February 28, 2018

“One Belt, One Road,” China’s $1 trillion infrastructure initiative, is a massive undertaking of highways, pipelines, transmission lines, ports, power stations, fiber optics, and railroads connecting China to Central Asia, Europe and Africa. According to Dan Slane, a former advisor in President Trump’s transition team, “It is the largest infrastructure project initiated by one nation in the history of the world and is designed to enable China to become the dominant economic power in the world.” In a January 29th article titled “Trump’s Plan a Recipe for Failure, Former Infrastructure Advisor Says,” he added, “If we don’t get our act together very soon, we should all be brushing up on our Mandarin.”

On Monday, February 12th, President Trump’s own infrastructure initiative was finally unveiled. Perhaps to trump China’s $1 trillion mega-project, the Administration has now upped the ante from $1 trillion to $1.5 trillion, or at least so the initiative is billed. But as Donald Cohen observes in The American Prospect, it’s really only $200 billion, the sole sum that is to come from federal funding; and it’s not even that after factoring in the billions in tax cuts in infrastructure-related projects. The rest of the $1.5 trillion is to come from cities, states, and private investors; and since city and state coffers are depleted, that chiefly means private investors. The focus of the Administration’s plan is on public-private partnerships, which as Slane notes are not suitable for many of the most critical infrastructure projects, since they lack the sort of ongoing funding stream such as a toll or fee that would attract private investors. Public-private partnerships also drive up costs compared to financing with municipal bonds.

In any case, as Yves Smith observes, private equity firms are not much interested in public assets; and to the extent that they are, they are more interested in privatizing existing infrastructure than in funding the new development that is at the heart of the president’s plan. Moreover, local officials and local businessmen are now leery of privatization deals. They know the price of quick cash is to be bled dry with user charges and profit guarantees.

The White House says its initiative is not a take-it-or-leave-it proposal but is the start of a negotiation, and that the president is “open to new sources of funding.” But no one in Congress seems to have a viable proposal. Perhaps it is time to look more closely at how China does it . . . .

February 27, 2018

While Bitcoin, supposedly finance's alternative to traditional banks, is fluctuating all over the place thus being more of a speculative investment rather than a means of doing business, another mobile based banking service, completely independent of traditional banks, called M-Pesa is enabling people in the poorest parts of the world to do business with extremely low transaction charges. The service enables its users to:

*deposit and withdraw money*transfer money to other users*pay bills*purchase airtime and

transfer money between the service and, in some markets like Kenya, a bank account. A partnership with Kenya-based Equity Bank launched M-KESHO, a product using M-PESA’s platform and agent network, that offers expanded banking services like interest-bearing accounts, loans, and insurance.

M-Pesa (M for mobile, pesa is Swahili for money) is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007 by Vodafone for Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania. It has since expanded to Afghanistan, South Africa, India and in 2014 to Romania and in 2015 to Albania. M-Pesa allows users to deposit, withdraw, transfer money and pay for goods and services (Lipa na M-Pesa) easily with a mobile device.

One might ask how does this service differ from Bitcoin and other blockchain type forms of money currently all the rage in the western world. The difference seems to be that M-Pesa is a practical service that fulfills a need - inexpensive financial transactions that bypass the more expensive banking system. M-Pesa allows for digital wallets just as Bitcoin does.

Supposedly Bitcoin is unhackable, but is it really? Mt.Gox, which was an exchange on which one could buy and sell Bitcoin, lost $400 million dollars. And is the blockchain really necessary in order to secure financial transactions? I don't think so. I don't think every unit of currency needs to be tracked from its birth to its grave which is what Bitcoin does. I think the blockchain is a hoax.

Bitcoin has a way of creating "bitcoins' called mining similar to mining for gold only in this case everything is digital and there is no actual physical substance involved. Hokey to say the least when all you are trying to do are simple financial transactions like M-Pesa is capable of.

One might ask how would a public bank be able to make use of a facility like M-Pesa to enable very low cost financial transactions. This would be similar to a debit card, but would also enable small loans without a huge amount of paperwork and hence higher cost - sort of a debit/credit card combination.

Ellen Brown, author of Web of Debt and The Public Bank Solution, is currently writing a book on the comparison of Bitcoin and public banking. Maybe she can enlighten us as to how a solution like M-Pesa can fit into the public banking solution. There are some exciting things happening that will change the role of traditional banking.

February 14, 2018

January 22, 2018

PHOTO INFORMATION: State Rep. Martin Howrylak (seated, second from right), of Troy, introduces bipartisan legislation at the Clerk’s Office of the House of Representatives that would create a state-owned bank in Michigan. Howrylak was joined by (from left) state Reps. Henry Yanez of Sterling Heights, Abdullah Hammoud of Dearborn and Peter Lucido of Shelby Township.State Rep. Martin Howrylak, of Troy, today formally introduced a bipartisan package of bills that would create and maintain a state bank. The bank would be authorized to engage in limited banking activities, including the facilitation of loans to eligible groups, municipalities and those who qualify for business-related subsidies

“This is a fiscally responsible solution for taxpayers,” said Howrylak. “As states are looking for ways to reduce spending, many are exploring the idea of a state-owned bank, similar to the Bank of North Dakota. In North Dakota, public revenue runs through the state-owned bank (Bank of North Dakota, BND). The BND provides loans significantly below market interest rates to local governments, smaller banks and businesses. Local governments and schools use these savings to pump more money into classrooms, expand access to infrastructure funding and keep tax rates low.”

North Dakota is the only state in the nation which runs its own financial institution. The Bank of North Dakota was founded in 1919 through legislative action and had an operating income of $136.2 million as of 2016. The state bank partners with community banks, overseeing loans or purchasing them to give community banks viability and an additional fund source.

A Michigan state-run bank would effectively be a co-operative, holding state and local government funds. The bank could then use those funds to provide loans to the state and its subdivisions (schools, cities, townships, villages, etc.). That model has successfully been used in North Dakota, significantly reducing the cost of capital to taxpayers and helping keep taxes low. Like the Bank of North Dakota, this bank will not have retail branches. Its operations will be focused on wholesale lending.

The legislative package would:

• Establish the Bank of Michigan and authorize it to receive state tax revenue.

• Create an advisory board for the bank composed of seven members appointed by the governor, which will include representatives from the private banking industry.

• Provide oversight by allowing an Auditor General to audit the bank and prepare an annual financial report. The Department of Insurance and Financial Services will also be responsible for reviewing the bank’s operations at least once every two years and will have authority to investigate.

• Permit the Community Bank of Michigan to lease and sell state-acquired property or partner with other banks and make loans to Michigan farmers; nonprofits using funds for rural business development; parks or recreational properties owned by the Department of Natural Resources that are in need of construction, reconstruction, renovation or maintenance; and government medical facilities for financing.

“This legislation allows the state to offer reasonable interest rates for targeted projects that benefit the public interest, while generating additional revenue for the state’s general fund,” said Howrylak. “The State Bank of Michigan would be a win-win for taxpayers, schools, local governments and local banks.”

House Bills 5431-5434, along with House Joint Resolution CC – which protects a state bank from governmental deposit limits – were referred to the House Regulatory Reform Committee for consideration.

January 07, 2018

This is the second in a two-part article on the debt burden America’s students face. Read Part 1 here.

The lending business is heavily stacked against student borrowers. Bigger players can borrow for almost nothing, and if their investments don’t work out, they can put their corporate shells through bankruptcy and walk away. Not so with students. Their loan rates are high and if they cannot pay, their debts are not normally dischargeable in bankruptcy. Rather, the debts compound and can dog them for life, compromising not only their own futures but the economy itself.

“Students should not be asked to pay more on their debt than they can afford,” said Donald Trump on the presidential campaign trail in October 2016. “And the debt should not be an albatross around their necks for the rest of their lives.” But as Matt Taibbi points out in a December 15 article, a number of proposed federal changes will make it harder, not easier, for students to escape their debts, including wiping out some existing income-based repayment plans, harsher terms for graduate student loans, ending a program to cancel the debt of students defrauded by ripoff diploma mills, and strengthening “loan rehabilitation” – the recycling of defaulted loans into new, much larger loans on which the borrower usually winds up paying only interest and never touching the principal. The agents arranging these loans can get fat commissions of up to 16 percent, an example of the perverse incentives created in the lucrative student loan market. Servicers often profit more when borrowers default than when they pay smaller amounts over a longer time, so they have an incentive to encourage delinquencies, pushing students into default rather than rescheduling their loans. It has been estimated that the government spends $38 for every $1 it recovers from defaulted debt. The other $37 goes to the debt collectors.

The securitization of student debt has compounded these problems. Like mortgages, student loans have been pooled and packaged into new financial products that are sold as student loan asset-backed securities (SLABS). Although a 2010 bill largely eliminated private banks and lenders from the federal student loan business, the “student loan industrial complex” has created a $200 billion market that allows banks to cash in on student loans without issuing them. About 80 percent of SLABS are government-guaranteed. Banks can sell, trade or bet on these securities, just as they did with mortgage-backed securities; and they create the same sort of twisted incentives for loan servicing that occurred with mortgages.

December 05, 2017

A report from The City’s Budget Analyst determined that if San Francisco were to establish a public bank, the financial benefits could create more funding for loans for affordable housing projects, small businesses and low-income households. (Jessica Christian/S.F. Examiner)

Supervisors Malia Cohen and Sandra Fewer are advancing the idea of establishing a municipal bank, which would end The City’s use of profit-driven large national commercial banks for banking services.

The only public bank in the U.S. is the state-owned and operated Bank of North Dakota, which dates back to 1919 and remains profitable. But others may at last follow suit as Wall Street financial institutions are coming under increased criticism for banking practices and investments in fossil fuels.

Public banks are also gaining traction in the era of legalized recreational cannabis. Those in the cannabis business are unable to use banks since the drug remains illegal under federal law.

“This ongoing public banking discussion is coming at an important moment in our community,” Cohen said last week. “This month, the San Francisco Retirement Board is expected to finally discuss the vote on fossil fuel divestment. This week, in Washington, the Trump administration is working to diminish the power of the Consumer Financial Protection Bureau, thus limiting the oversight of big banks on Wall Street.”

Cohen continued, “In our long cannabis discussion, we have barely acknowledged that cannabis is currently an all-cash business — cash payroll, no banking, vaults of bills on the floors of retailers.”

Last month, California Treasurer John Chiang recommended studying opening a state bank for those in the cannabis industry to open bank accounts and pay taxes.

With the passage of Proposition 64 last year, recreational cannabis becomes legal on Jan. 1. The industry is expected to have more than $7 billion in sales and an estimated $1 billion in tax revenues.

“It is unfair and a public safety risk to require a legal industry to haul duffle bags of cash to pay taxes, employees and utility bills,” Chiang said in a Nov. 7 statement. “The reliance on cash paints a target on the back of cannabis operators and makes them and the general public vulnerable to violence and organized crime.”

Eleven other states or cities — including Santa Fe, Oakland, Philadelphia, Vermont and New Hampshire — have proposed or are studying public banks of their own.

November 08, 2017

Phil Murphy, a former banker with a double-digit lead in New Jersey’s race for governor, has made a state-owned bank a centerpiece of his platform. If he wins on November 7, the nation’s second state-owned bank in a century could follow.

More than three-quarters of the MPs surveyed incorrectly believed that only the government has the ability to create new money. . . .

The Bank of England has previously intervened to point out that most money in the UK begins as a bank loan. In a 2014 article the Bank pointed out that “whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

The Bank of England researchers said that 97% of the UK money supply is created in this way. In the US, the figure is about 95%. City A.M. quoted Fran Boait, executive director of the advocacy group Positive Money, who observed:

“Despite their confidence in telling the public that there is ‘no magic money tree’ to pay for vital services, politicians themselves are shockingly ignorant of where money actually comes from.

“There is in fact a ‘magic money tree’, but it’s in the hands of commercial banks, such as Barclays, HSBC and RBS, who create money whenever they make loans.”

For those few politicians who are aware of the banks’ magic money tree, the axiom that the people should own the banks – or at least some of them – is a no-brainer. One of these rare politicians is Phil Murphy, who has a double-digit lead in New Jersey’s race for governor. Formerly a Wall Street banker himself, Murphy knows how banking works. That helps explain why he has boldly made a state-owned bank a centerpiece of his platform. He maintains that New Jersey’s billions in tax dollars should be kept in the state’s own bank, where it can leverage its capital to fund local infrastructure, small businesses, affordable housing, student loans, and other state needs. New Jersey voters go to the polls on November 7.

That means New Jersey could soon have the second publicly-owned depository bank in the country, following the very successful century-old Bank of North Dakota (BND). Other likely contenders among about twenty public banking initiatives now underway include Washington State, which has approved a feasibility study for a state bank; and the cities of Santa Fe in New Mexico and Los Angeles and Oakland in California, which are exploring the feasibility of their own city-owned banks.

November 01, 2017

Crushing regulations are driving small banks to sell out to the megabanks, a consolidation process that appears to be intentional.

Publicly-owned banks can help avoid that trend and keep credit flowing in local economies.

At his confirmation hearing in January 2017, Treasury Secretary Stephen Mnuchin said, “regulation is killing community banks.” If the process is not reversed, he warned, we could “end up in a world where we have four big banks in this country.” That would be bad for both jobs and the economy. “I think that we all appreciate the engine of growth is with small and medium-sized businesses,” said Mnuchin. “We’re losing the ability for small and medium-sized banks to make good loans to small and medium-sized businesses in the community, where they understand those credit risks better than anybody else.”

The number of US banks with assets under $100 million dropped from 13,000 in 1995 to under 1,900 in 2014. The regulatory burden imposed by the 2010 Dodd-Frank Act exacerbated this trend, with community banks losing market share at double the rate during the four years after 2010 as in the four years before. But the number had already dropped to only 2,625 in 2010. What happened between 1995 and 2010?

Six weeks after September 11, 2001, the 1,100 page Patriot Act was dropped on congressional legislators, who were required to vote on it the next day. The Patriot Act added provisions to the 1970 Bank Secrecy Act that not only expanded the federal government’s wiretapping and surveillance powers but outlawed the funding of terrorism, imposing greater scrutiny on banks and stiff criminal penalties for non-compliance. Banks must now collect and verify customer-provided information, check names of customers against lists of known or suspected terrorists, determine risk levels posed by customers, and report suspicious persons, organizations and transactions. One small banker complained that banks have been turned into spies secretly reporting to the federal government. If they fail to comply, they can face stiff enforcement actions, whether or not actual money-laundering crimes are alleged.

In 2010, one small New Jersey bank pleaded guilty to conspiracy to violate the Bank Secrecy Act and was fined $5 million for failure to file suspicious-activity and cash-transaction reports. The bank was acquired a few months later by another bank. Another small New Jersey bank was ordered to shut down a large international wire transfer business because of deficiencies in monitoring for suspicious transactions. It closed its doors after it was hit with $8 million in fines over its inadequate monitoring policies.

Complying with the new rules demands a level of technical expertise not available to ordinary mortals, requiring the hiring of yet more specialized staff and buying more anti-laundering software. Small banks cannot afford the risk of massive fines or the added staff needed to avoid them, and that burden is getting worse. In February 2017, the Financial Crimes Enforcement Network proposed a new rule that would add a new category requiring the flagging of suspicious “cyberevents.” According to an April 2017 article in American Banker:

[T]he “cyberevent” category requires institutions to detect and report all varieties of digital mischief, whether directed at a customer’s account or at the bank itself. . . .

Under a worst-case scenario, a bank’s failure to detect a suspicious [email] attachment or a phishing attack could theoretically result in criminal prosecution, massive fines and additional oversight.

One large bank estimated that the proposed change with the new cyberevent reporting requirement would cost it an additional $9.6 million every year.

Besides the cost of hiring an army of compliance officers to deal with a thousand pages of regulations, banks have been hit with increased capital requirements imposed by the Financial Stability Board under Basel III, eliminating the smaller banks’ profit margins. They have little recourse but to sell to the larger banks, which have large compliance departments and can skirt the capital requirements by parking assets in off-balance-sheet vehicles.

October 12, 2017

Los Angeles is considering the formation of a public bank so that the cannabis industry has some place to deposit their money. Since cannabis is illegal at the Federal level, Wall Street banks like Wells Fargo cannot accept their money as deposits. However, since cannabis is legal at the state level in some states like California, a public bank similar to the Public Bank of North Dakota which is wholly state owned is the logical solution.

The Bank of North Dakota, the only publicly owned bank in the country, has paid $85 million into various state government funds over the last four years, according to its most recent annual report. It makes low-interest student loans and farm loans and helps finance local public-works projects, all priorities set by state leaders.

So instead of sending city or state deposits off to Wall Street banks like Wells Fargo which have been shown to be fraudulent and which play games with pension fund money including siphoning it off for their own benefit, why not keep the money in the state for the purposes of benefiting the people of the state.

One of the key questions surrounding the establishment of a public bank is how to capitalize it. This would seem to be solved initially by taking deposits from the cannabis industry. After the bank was established other deposits from city and state tax revenues could be deposited in the public bank without Wall Street taking a cut. There is also the question of Federal institutions and oversight that would be denied to a bank taking cannabis money. They could mainly be gotten around except for one. To be able to process checks, wire transfers and electronic payments — in other words, to interact with the rest of the financial system — banks must have an account with one of the nation’s 12 regional Federal Reserve banks. That conundrum remains to be solved unless the Federal Reserve Bank of San Francisco, the central bank for California and eight other western states, decides to accept LA's application even if it accepts cannabis money.

Ellen Brown, author of The Public Bank Solution and Web of Debt is considered the foremost expert in this field and several cities and states are actively looking into the establishment of public banks to serve the people of their respective jurisdictions and cut out Wall Street profits.

August 28, 2017

Public banking is an idea whose time has come. Innovators and forward thinking visionaries are promoting a radical idea- that the circulatory system of the economy should be in public rather than private hands, serving, to use the words of Rousseau, the General Will- what’s best for everyone, instead of the Particular Will, what’s best for a faction of people at the expense of everyone else- the way private banking works today.

Banking is at the heart of the entire economy, it determines where the money flows- for better or for worse, and with such a vital public service in the hands of an oligarchic and extractive financial elite, pernicious abuse of this power is the norm.

The public bank solution has the potential to fundamentally transform the nature of the economy and even the very notion of economics, to make it once and for all in the service for and by the people instead of for and by private financial elites.Make no mistake, what we're advocating fo is nothing short of a revolution. Imagine if this idea caught fire, went viral, and spread to all 50 States?

Let no one allow us to sell ourselves short, we must strive for nothing less than a radical system overhaul that definitively and decisively transfers the levers of control from oligarchs to the people, from Wall St. to Main St. Too much is at stake for the human race in too little a time frame to settle for anything less.

What we need is an expansion on the notion of a social economy through public banking- to introduce some new ideas into the discussion.

The public bank revolution can sweep the nation state by state. But there is a key element to consider for socially and environmentally responsible economics- the notion of scale.

Public banking advocates have eloquently discussed all the incredible benefits of a state public bank. However, in addition, there is an even smaller economic and civic unit than a state, one might say the most fundamental economic and civic unit of them all- the CITY.

What if, in addition to a California state bank, and public banks in other states, we also saw the proliferation of Municipal Public Banks sweep the nation? Banks owned and operated by and for local communities.

July 24, 2017

Illinois is teetering on bankruptcy and other states are not far behind, largely due to unfunded pension liabilities; but there are solutions. The Federal Reserve could do a round of “QE for Munis.” Or the state could turn its sizable pension fund into a self-sustaining public bank.

"If Illinois were a corporation, it could declare bankruptcy; but states are constitutionally forbidden to take that route." (Photo: Andrew Harrer/Bloomberg via Getty Images)

Illinois is insolvent, unable to pay its bills. According to Moody’s, the state has $15 billion in unpaid bills and $251 billion in unfunded liabilities. Of these, $119 billion are tied to shortfalls in the state’s pension program. On July 6, 2017, for the first time in two years, the state finally passed a budget, after lawmakers overrode the governor’s veto on raising taxes. But they used massive tax hikes to do it – a 32% increase in state income taxes and 33% increase in state corporate taxes – and still Illinois’ new budget generates only $5 billion, not nearly enough to cover its $15 billion deficit.

Adding to its budget woes, the state is being considered by Moody’s for a credit downgrade, which means its borrowing costs could shoot up. Several other states are in nearly as bad shape, with Kentucky, New Jersey, Arizona and Connecticut topping the list. U.S. public pensions are underfunded by at least $1.8 trillion and probably more, according to expert estimates. They are paying out more than they are taking in, and they are falling short on their projected returns. Most funds aim for about a 7.5% return, but they barely made 1.5% last year.

If Illinois were a corporation, it could declare bankruptcy; but states are constitutionally forbidden to take that route. The state could follow the lead of Detroit and cut its public pension funds, but Illinois has a constitutional provision forbidding that as well. It could follow Detroit in privatizing public utilities (notably water), but that would drive consumer utility prices through the roof. And taxes have been raised about as far as the legislature can be pushed to go.

The state cannot meet its budget because the tax base has shrunk. The economy has shrunk and so has the money supply, triggered by the 2008 banking crisis. Jobs were lost, homes were foreclosed on, and businesses and people quit borrowing, either because they were “all borrowed up” and could not go further into debt or, in the case of businesses, because they did not have sufficient customer demand to warrant business expansion. And today, virtually the entire circulating money supply is created when banks make loans When loans are paid down and new loans are not taken out, the money supply shrinks. What to do?

From Seattle to Santa Fe, cities are at the center of a movement to create publicly owned banks.

May 22, 2017

When Craig Brandt marched into the City Council chambers in Oakland, California, in the summer of 2015, he was furious about fraud.

The long-time local attorney and father of two had been following the fallout from the Libor scandal, a brazen financial scam that saw some of the biggest banks on Wall Street illegally manipulate international interest rates in order to boost their profits. By some estimates, the scheme cost cities and states around the country well over $6 billion. In June of 2015, Citigroup, JPMorgan Chase, and Barclays, among other Libor-rigging giants, pleaded guilty to felony charges related to the conspiracy and agreed to pay more than $2.5 billion in criminal fines to US regulators. But, for Brandt, that wasn’t enough. He wanted the banks banished, blocked from doing business in his city.

“I was totally pissed about it,” he says. “It was straight-up fraud.”

So, in a small act of stick-it-to-the-man defiance, Brandt drafted a resolution that barred the municipality from working with any firm that had either committed a felony or had recently paid more than $150 million in fines. He presented the homespun and eminently reasonable legislation to city officials and urged them to adopt it.

“The city councilors said they couldn’t do it,” Brandt says. “If they did, they wouldn’t have a bank left to work with. They said there wouldn’t be any bank big enough to take the city’s deposits.” Oakland, it seemed, was hopelessly dependent on ethically dubious and occasionally criminal financial titans. Brandt, however, was undeterred.

After the City Council turned him down, he started looking for other ways to wean Oakland off Wall Street. That’s when he fell in with a group of locals who have been nursing an audacious idea. They want their city to take radical action to combat plutocracy, inequality, and financial dislocation. They want their city to do something that hasn’t been done in this country in nearly a century, not since the trust-busting days of the Progressive Era. They want their city to create a bank—and, strange as the idea may seem, it’s not some utopian scheme. It’s a cause that’s catching on.

Across the country, community activists, mayors, city council members, and more are waking up to the power and the promise of public banks. Such banks are established and controlled by cities or states, rather than private interests. They collect deposits from government entities—from school districts, from city tax receipts, from state infrastructure funds—and use that money to issue loans and support public priorities. They are led by independent professionals but accountable to elected officials. Public banks are a way, supporters say, to build local wealth and resist the market’s predatory predilections. They are a way to end municipal reliance on Wall Street institutions, with their high fees, their scandal-ridden track records, and their vile investments in private prisons and pipelines. They are a way, at long last, to manage money in the public interest.

July 15, 2017

The Federal Reserve controls interest rates in the US, and the Federal Reserve is privately owned by the big Wall Street banks that it supposedly controls. Only it doesn't really control them so much as it represents their interests. The powers that be would have you believe that the Federal Reserve, which is the US' central bank, is publicly owned, that is, that it's a government institution accountable to the people. Nothing could be further from the truth. Bernie Sanders commented: "The conflicts of interest are so apparent that they're laughable," Sanders told CNN's Wolf Blitzer "Here you have the Fed, which is supposed to regulate Wall Street. Then you have the CEO of the largest Wall Street company on the board which [it] is supposed to be regulating. This is the fox guarding the henhouse." He was speaking of Jamie Diamond, CEO of JPMorgan Chase.

Jamie Diamond is a billionaire, and he donates to the Democratic party. He's a Democrat, obviously a very influential one. No wonder Hillary was getting paid $250K per speech. After leaving office as Secretary of State in 2013, Clinton embarked on a career speaking to banks, securities firms and other financial institutions. Tax returns show that her minimum fee was $225,000 per speech. So Jamie was no stranger to her. Neither was Lloyd Blankfein, CEO of Goldman Sachs. He supported Hillary in more ways than one in the last election. He's also a Democrat. Is it any wonder the Democratic party does not want to alienate Wall Street?

The Fed supposedly has a "dual mandate" as far as the government is concerned. It is supposed to maximize employment and regulate interest rates. In other words it is supposed to keep inflation under control. But this amounts to a 'wish list' since neither the government or the people "own" the Federal Reserve bank. It is owned privately by the banks which it supposedly regulates. Also, its "mandate" to maximize employment has nothing to do with how well employees are paid, only that they are "employed." Most of the jobs being created these days are low level service jobs paying minimum wage or slightly above it. In reality the Fed operates in such a way as to increase income inequality.

Interest rate swaps are based on either the Fed's prime rate or on the LIBOR rate. That’s because the prime and LIBOR rates, two important benchmarks to which these loans are often pegged, have a close relationship to the federal funds rate. And the banks themselves determine all these rates either directly or indirectly. The LIBOR is an average interest rate calculated through submissions of interest rates by major banks across the world. The LIBOR scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades. LIBOR underpins approximately $350 trillion in derivatives so the banks themselves were in a position to make sure that their bets on interest rate swaps were covered in their favor at the expense of other naive parties like pension funds.

“The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson.” – FDR letter to Colonel Edward House, Nov. 21 1933

Is it any wonder that, after the 2008 financial crisis, Wall Street banks and other financial institutions were bailed out and middle class homeowners with underwater mortgages were left to twist in the wind? The Fed flooded the market with liquidity by buying up toxic securities, securities which would have caused bankruptcies of major financial institutions if nothing was done about it. They also lowered interest rates to zero so the Big Banks could borrow money from the Fed at no interest and then make money off the spread by charging average citizens interest rates well above zero. This not only bailed out the Big Banks; it kept the debt based American economy going in full swing. Student loan debt soared. Credit card debt soared. And savers got no return on their savings accounts. Take that, senior citizens.

July 06, 2017

The vast amount of money paid to Wall Street by America’s cities, counties, and states has profound impacts on our lives and local economies. Most citizens don’t know about it – they just pay it. It’s a staggering amount: Over $1 trillion moves from taxpayer pockets into private Wall Street hands each year in the form of interest payments on bonds, loans, fees, and financial product costs which have caused:

School closures

Lost jobs

Life-long student debt

Reduced public services and infrastructure

Privatized public assets, and

Stymied local businesses who can’t get affordable funding to grow.

Wall Street extractions from the public purse seriously hurt America’s strength and in just a few years will consume one-third of our economy’s production in interest payments.

WE MUST PUSH BACK

In an exclusive initiative by the Public Banking Institute, What Wall Street Costs America begins a national conversation about the urgent need to break free of our reliance on the costly private financing of public investment. The debt load is squashing local economies, ruining our school systems, letting our infrastructure crumble, and so much more. Once people learn these facts and discover the alternatives, we can move toward public finance of our public needs without Wall Street usury.

What Wall Street Costs America will provide the ONLY aggregated look at our local and national debt costs through an interactive map with data figures and human stories of what Wall Street has really cost America. This project lays out the facts so that citizens can act. Breaking our dependence on Wall Street usury means reclaiming control of our money through publicly-owned, public-interest banks. Join us in taking a stand together.

WHAT WALL STREET COSTS AMERICA WILL

• Unify citizen action across citizen groups to stand united against Wall Street abuse at the local level• Create supportive educational webinars to help local efforts• Host a central campaign website offering geographical data displays and narratives that tell the true stories of how Wall Street extractions have punished our nation’s people and economy• Create new media content and videos to educate and inspire citizen knowledge and action• Provide direct support for citizens to start new public banks that serve the public interest where they live• Create strategic collaborations for action across groups such as social and economic justice, local business, tax relief, education, labor, and many more to start actually changing the system

JOIN US ON THIS PROJECT!

This is a project for everyone--and we need people from every city, town, county, and state to share their knowledge and resources to paint the largest collective picture ever painted of America's wealth transfer to Wall Street. You can:

July 05, 2017

Wall Street has created a major problem for many U.S. states. A notable case: Illinois supposedly is collapsing from debt obligations, says this latest breathless report from Zero Hedge, as well as most major media.

...and it's all based on lies.

A quick look at the 2016 CAFR for Illinois (pages 34 and 44) shows some $94 billion in the pension, treasurer's and Private-Purpose Trust funds (do YOU "trust" the Trust funds? I don't...), and with general government funds, the total exceeds $100 billion.

Pension funds cannot payout more than about 5%/year of their assets. If they did, they would go broke because they don't generally earn more than that; the good ones that win awards earn 6%/year and do it consistently.

OK, so here's what Illinois needs to do, adopting emergency measures to get around restrictive current laws:

Make an iron-clad pledge by law, even in the State Constitution if they can get quick agreement, to provide for pension payouts at the current level and adjusted for inflation in the future.

Liquidate the current pension fund and maybe some of the other liquid funds too to pay off all current debts.

This will leave them with a great credit rating - assuming the jilted Wall Street firms don't force the Put the remaining 10s of billions into a new State Bank, partnering with the beleaguered small and community banks (an FDIC state sorted list of failed banks shows dozens in Illinois: .fdic.gov/bank/individual/failed/banklist.html). Use that money to finance state and local businesses and individuals instead of Wall Street schemes and high fund manager fees that will no longer be necessary or advisable, saving the state 100s of millions a year.

The Public Bank could be built roughly on the model of the hugely successful Bank of North Dakota example, one of the country's greatest banks, measured by Return on Equity, and scandal-free since its founding in 1919.

It's simple, really, when you get outside the Wall Street-Bankster codified box of thinking. Why should a State keep an enormous fund just to spin off a few percent a year to pensioners? Who benefits from such an arrangement? The State will never go out of business, unlike an actual business that might. So why "guarantee" liquidity this way - which, as we've seen, isn't even a real guarantee - when the state can always pay its obligations through normal taxation options?

The big drain on State budgets isn't the pension obligations, it is:

the obligations to increase the fund from which those obligations are paid:

the fees to the managers of that fund; and

the interest payments on the debt, all of which could be wiped out if the current pension and other special set-aside funds were eliminated and the State went back to pay-as-you-go, with just a modest cushion for the year's expenses.

(The highly dubious assumptions of inadequate future return-on-investments are another subject I won't get into here, but it's something many experts have questioned).

A little less money for Wall Street, a lot more for the taxpayers and citizens. That's a square deal worthy of the Land of Lincoln, Illinois.

This article is based on a post which appeared on OpEd News 03 July 2017.

June 20, 2017

June 03, 2017

Under the “One Belt, One Road” plan, China is remaking global trade and nurturing geopolitical ties.

One Belt One Road initiative to connect China to Europe (credit:YouTube)

The plan promises more than $1 trillion in infrastructure investments that span 60-plus countries across Europe, Asia and Africa.

While Trump touts "America First" as his watchword, China is undertaking a massive development program that will expedite trade and benefit China and its partners economically as it gains influence throughout much of the world. The US Trans Pacific Partnership which is now defunct was supposed to counter growing Chinese influence, but now China will become the dominant player in the world economy gaining friends and alliances along the way.

An Up-To-Date Silk Road

The Silk Road was an ancient network of trade routes that were for centuries central to cultural interaction originally through regions of Eurasia connecting the East and West. The Silk Road derives its name from the lucrative trade in silk carried out along its length, beginning during the Han dynasty (207 BCE – 220 CE). Trade along this corridor did much to promote political and economic ties among China, Asia, Africa and Europe. China now seeks to build a modern version of the Silk Road.

Unlike the US which seems to impose its western, capitalist democratic values on the rest of the world, China is out to prove that its model is more viable because it is stimulative of commerce without demanding fealty or allegiance to western values in return. Major countries participating include Russia, India, the Philippines, Iran and Iraq. These countries working together will form a relationship that will counterbalance US influence which will be relegated to its allies in Europe, which is having second thoughts about the US thanks to Trump, and South America much of which is a basket case. Trump's insistence on renegotiating NAFTA is sure to distance both Mexico and Canada. His building a wall between the US and Mexico will further anger south and central American countries.

Trump's withdrawal from the Paris climate change accords signals the moment when the US lost its hegemony over the rest of the world. Now China is positioned to fill the void. The US seems incapable of coming up with the $4.6 trillion needed to repair its own infrastructure according to the American Society of Civil Engineers, much less build infrastructure in the rest of the world like China is doing. It's clear that the contingent landmass of Asia, Russia and Africa will fall under Chinese geopolitical influence.

Credit: Dave Simmonds

The American model of loaning money to other nations via Wall Street banks and then demanding austerity measures and privatization of governmental assets when their payments fall short will soon be a thing of the past in terms of appealing to developing nations. Even Europe, notably Germany, is distancing itself from the US. Angela Merkel said recently, "And that is why I can only say that we Europeans must really take our fate into our own hands - of course in friendship with the United States of America, in friendship with Great Britain and as good neighbors wherever that is possible also with other countries, even with Russia." Germany gets a large percentage - about 40% - of its natural gas from Russia. They might decide to participate in China's Belt and Road program now that they seem to be detaching themselves from Great Britain and the US or rather it's the other way around. Britain and the US have detached themselves from Germany thanks to Brexit and Trump.

May 19, 2017

May 15th-19th has been designated “National Infrastructure Week” by the US Chambers of Commerce, the American Society of Civil Engineers (ASCE), and over 150 affiliates. Their message: “It’s time to rebuild.” Ever since ASCE began issuing its “National Infrastructure Report Card” in 1998, the nation has gotten a dismal grade of D or D+. In the meantime, the estimated cost of fixing its infrastructure has gone up from $1.3 trillion to $4.6 trillion.

While American politicians debate endlessly over how to finance the needed fixes and which ones to implement, the Chinese have managed to fund massive infrastructure projects all across their country, including 12,000 miles of high-speed rail built just in the last decade. How have they done it, and why can’t we?

A key difference between China and the US is that the Chinese government owns the majority of its banks. About 40% of the funding for its giant railway project comes from bonds issued by the Ministry of Railway, 10-20% comes from provincial and local governments, and the remaining 40-50% is provided by loans from federally-owned banks and financial institutions. Like private banks, state-owned banks simply create money as credit on their books. (More on this below.) The difference is that they return their profits to the government, making the loans interest-free; and the loans can be rolled over indefinitely. In effect, the Chinese government decides what work it wants done, draws on its own national credit card, pays Chinese workers to do it, and repays the loans with the proceeds.

The US government could do that too, without raising taxes, slashing services, cutting pensions, or privatizing industries. How this could be done quickly and cheaply will be considered here, after a look at the funding proposals currently on the table and at why they are not satisfactory solutions to the nation’s growing infrastructure deficit.

The Trump administration, road privatization industry, and a broad mix of congressional leaders are keen on ramping up a large private financing component (under the marketing rubric of ‘public-private partnerships’), but have not yet reached full agreement on what the proportion should be between tax breaks and new public money—and where that money would come from. Over 500 projects are being pitched to the White House. . . .

Democrats have had a full plan on the table since January, advocating for new federal funding and a program of infrastructure renewal spread through a broad range of sectors and regions. And last week, a coalition of right wing, Koch-backed groups led by Freedom Partners . . . released a letter encouraging Congress “to prioritize fiscal responsibility” and focus instead on slashing public transportation, splitting up transportation policy into the individual states, and eliminating labor and environmental protections (i.e., gutting the permitting process). They attacked the idea of a national infrastructure bank and . . . targeted the most important proposal of the Trump administration . . . —to finance new infrastructure by tax reform to enable repatriation of overseas corporate revenues . . . .

In a November 2014 editorial titled “How Two Billionaires Are Destroying High Speed Rail in America,” author Julie Doubleday observed that the US push against public mass transit has been led by a think tank called the Reason Foundation, which is funded by the Koch brothers. Their $44 billion fortune comes largely from Koch Industries, an oil and gas conglomerate with a vested interest in mass transit’s competitors, those single-rider vehicles using the roads that are heavily subsidized by the federal government.

Clearly, not all Republicans are opposed to funding infrastructure, since Donald Trump’s $1 trillion infrastructure plan was a centerpiece of his presidential campaign, and his Republican base voted him into office. But “establishment Republicans” have traditionally opposed infrastructure spending. Why? According to a May 15, 2015 article in Daily Kos titled “Why Do Republicans Really Oppose Infrastructure Spending?”:

Republicans – at the behest of their mega-bank/private equity patrons – really, deeply want to privatize the nation’s infrastructure and turn such public resources into privately owned, profit centers. More than anything else, this privatization fetish explains Republicans’ efforts to gut and discredit public infrastructure . . . .

If the goal is to privatize and monetize public assets, the last thing Republicans are going to do is fund and maintain public confidence in such assets. Rather, when private equity wants to acquire something, the typical playbook is to first make sure that such assets are what is known as “distressed assets” (i.e., cheaper to buy).

[T]here is a standard technique of privatization, namely defund what you want to privatize. Like when Thatcher wanted to [privatize] the railroads, first thing to do is defund them, then they don’t work and people get angry and they want a change. You say okay, privatize them . . . .

What’s Wrong with Public-Private Partnerships?

Privatization (or “asset relocation” as it is sometimes euphemistically called) means selling public utilities to private equity investors, who them rent them back to the public, squeezing their profits from high user fees and tolls. Private equity investment now generates an average return of about 11.8 percent annually on a ten-year basis. That puts the cost to the public of financing $1 trillion in infrastructure projects over 10 years at around $1.18 trillion, more than doubling the cost. Moving assets off the government’s balance sheet by privatizing them looks attractive to politicians concerned with this year’s bottom line, but it’s a bad deal for the public. Decades from now, people will still be paying higher tolls for the sake of Wall Street profits on an asset that could have belonged to them all along.

One example is the Dulles Greenway, a toll road outside Washington, D.C., nicknamed the “Champagne Highway” due to its extraordinarily high rates and severe underutilization in a region crippled by chronic traffic problems. Local (mostly Republican) officials have tried in vain for years to either force the private owners to lower the toll rates or have the state take the road into public ownership. In 2014, the private operators of the Indiana Toll Road, one of the best-known public-private partnerships (PPPs), filed for bankruptcy after demand dropped, due at least in part to rising toll rates. Other high-profile PPP bankruptcies have occurred in San Diego, CA; Richmond, VA; and Texas.

Countering the dogma that “private companies can always do it better and cheaper,” studies have found that on average, private contractors charge more than twice as much as the government would have paid federal workers for the same job. A 2011 report by the Brookings Institution found that “in practice [PPPs] have been dogged by contract design problems, waste, and unrealistic expectations.” In their 2015 report “Why Public-Private Partnerships Don’t Work,” Public Services International stated that “[E]xperience over the last 15 years shows that PPPs are an expensive and inefficient way of financing infrastructure and divert government spending away from other public services. They conceal public borrowing, while providing long-term state guarantees for profits to private companies.” They also divert public money away from the neediest infrastructure projects, which may not deliver sizable returns, in favor of those big-ticket items that will deliver hefty profits to investors.

A Better Way to Design an Infrastructure Bank

The Trump team has also reportedly discussed the possibility of an infrastructure bank, but that proposal faces similar hurdles. The details of the proposal are as yet unknown, but past conceptions of an infrastructure bank envision a quasi-bank (not a physical, deposit-taking institution) seeded by the federal government, possibly from taxes on the repatriation of offshore corporate profits. The bank would issue bonds, tax credits, and loan guarantees to state and local governments to leverage private sector investment. As with the private equity proposal, an infrastructure bank would rely on public-private partnerships and investors who would be disinclined to invest in projects that did not generate hefty returns. And those returns would again be paid by the public in the form of tolls, fees, higher rates, and payments from state and local governments.

There is another way to set up a publicly-owned bank. Today’s infrastructure banks are basically revolving funds. A dollar invested is a dollar lent, which must return to the bank (with interest) before it can be lent again. A chartered depository bank, on the other hand, can turn a one-dollar investment into ten dollars in loans. It can do this because depository banks actually create deposits when they make loans. This was acknowledged by economists both at the Bank of England (in a March 2014 paper entitled “Money Creation in the Modern Economy”) and at the Bundesbank (the German central bank) in an April 2017 report.

Contrary to conventional wisdom, money is not fixed and scarce. It is “elastic”: it is created when loans are made and extinguished when they are paid off. The Bank of England report said that private banks create nearly 97 percent of the money supply today. Borrowing from banks (rather than the bond market) expands the circulating money supply. This is something the Federal Reserve tried but failed to do with its quantitative easing (QE) policies: stimulate the economy by expanding the bank lending that expands the money supply.

The stellar (and only) model of a publicly-owned depository bank in the United States is the Bank of North Dakota (BND). It holds all of its home state’s revenues as deposits by law, acting as a sort of “mini-Fed” for North Dakota. According to reports, the BND is more profitable even than Goldman Sachs, has a better credit rating than J.P. Morgan Chase, and has seen solid profit growth for almost 15 years. The BND continued to report record profits after two years of oil bust in the state, suggesting that it is highly profitable on its own merits because of its business model. The BND does not pay bonuses, fees, or commissions; has no high paid executives; does not speculate on risky derivatives; does not have multiple branches; does not need to advertise; and does not have private shareholders seeking short-term profits. The profits return to the bank, which distributes them as dividends to the state.

The federal government could set up a bank on a similar model. It has massive revenues, which it could leverage into credit for its own purposes. Since financing is typically about 50 percent of the cost of infrastructure, the government could cut infrastructure costs in half by borrowing from its own bank. Public-private partnerships are a good deal for investors but a bad deal for the public. The federal government can generate its own credit without private financial middlemen. That is how China does it, and we can too.

For more detail on this and other ways to solve the infrastructure problem without raising taxes, slashing services, or privatizing public assets, see Ellen Brown, “Rebuilding America’s Infrastructure,”a policy brief for the Next System Project, March 2017.

In the aftermath of the 2008 financial crisis, the too big to fail (TBTF) Wall Street Banks took the $700 billion taxpayer bailout, massive federal reserve loans amounting to some $29 trillion1, and continued with business as usual.Credit to business did not increase, foreclosures weren’t reduced, derivatives continued unregulated, and massive annual bonuses continued to be paid to banking and investment staff, often for the types of risky behavior that drive financial crises. The new wave of Federal Reserve purchases of Treasury bonds and mortgage securities totaling $85 billion per month, referred to as quantitative easing that continues to this day, insures that risky behavior does not result in bank failures.

In fact, the quantitative easing policies have increased the money supply dramatically, allowing new bubbles to form in the financial sector. The burgeoning market for derivatives, interest rate swaps, credit default swaps,and repurchase agreements grows at an unregulated pace and now represents trading volume that is 20 times the size of the global economy. Yet even with all this new money in the system, there has not been a commensurate increase in credit to small business, foreclosure relief, or other signs that the banks are fostering healthy economic activity.

The questionable behavior of TBTF banks only seemed to accelerate day by day as new scandals continued to emerge: Drug Money Laundering by HSBC bank, LIBOR rate fixing, ISDAfix rate fixing, JP Morgan “London Whale” losses, etc. Congressional and third party investigators uncovered massive fraud and malfeasance, with one of the most disturbing examples being Goldman Sachs, showing the bank’s contempt for their clients in calling them “Muppets”. Goldman was proven to have sold high-risk mortgage-backed securities to their clients,and simultaneously bet against them by selling short, knowing they were worthless. Since the response of the federal government was weak, especially compared with the strong response by FDR in similar circumstances in 1933, people decided to take matters into their own hands and have been exploring a variety of alternatives. Some examples are described below.

“Occupy Wall Street” began their highly publicized occupation on September 17, 2011; On November 5, 2011,people joined a campaign to move millions of dollars from Wall St. to local banks and credit unions during “Move your Money” day; Interest in complementary currencies soared, such as the online currency BITCOIN that went from zero volume in 2008 to over 5 billion in circulation currently2; Interest in monetary policy reform was renewed, and old ideas were dusted off such as the 100% reserve proposal of the 1930s by prominent Chicago economists; An IMF economist published The Chicago PlanRevisited3; Representative Dennis Kucinich introduced a Congressional plan to implement The American Monetary Institute’s reforms known as the NEED Act. This bill would have transferred monetary authority back to the Treasury from the Federal Reserve Bank, and require100% reserve requirements, eliminating the creation of most of the money supply by banks. The idea of public credit money was inspired by California’s use of “tax anticipation”warrants, and there was new-found interest in the history of colonial scrip, Lincoln’s Greenbacks, Kennedy’s Silver certificates, and other interest-free USNotes4.

The Public Banking Alternative

It was in this context that Ellen Brown’s 2007 book Web of Debt explaining the history of the banking system using a clever “Wizard of Oz” allegory became a bestseller. Web of Debt promoted the concept of public banks, and people turned their attention to the Bank of North Dakota, the only public bank in the continental United States (Puerto Rico also has one). What they discovered was a conservative institution with radical roots in 1919 that seemed to account for North Dakota’s immunity to the financial crisis. Ellen Brown writes, “North Dakota has had the lowest unemployment in the country (or was tied for the lowest unemployment rate in the country) every single month since July 2008…North Dakota is the only state to be in continuous budget surplus since the banking crisis of 2008. Its balance sheet is so strong that it recently reduced individual income taxes and property taxes by a combined $400 million, and is debating further cuts. It also has the lowest foreclosure rate and lowest credit card default rate in the country, and it has had NO bank failures in at least the last decade…It has contributed over $300 million in revenues over the last decade to state coffers”5. Naturally people are interested in this kind of performance for their state, especially if the results are not all due to oil. Advocates point out the fact that the Bank of North Dakota was returning revenue to the state prior to the oil boom, and other oil producing states aren’t faring as well. The Public Banking Institute6 was formed to promote the idea of public banks across the US.

For all the reasons mentioned above, legislators, citizens, and many others have been interested in exploring the concept of a public bank for the state, especially since North Dakota and Vermont have nearly identical population size, are both in northern climates, are agricultural states, and are similar in various other ways. But does the idea make sense for Vermont? This report will attempt to take a comprehensive look at the issues and evaluate this question. The North Dakota model may not be right for Vermont, but it may have some useful lessons. The Joint Fiscal Office has briefly reviewed the topic, and the legislature has attempted bills to study the question on several occasions, but none of these study bills have ever passed out of committee. Therefore a coalition of organizations, individuals, and businesses that first came together in 2011 called Vermonters for a New Economy decided to conduct a study of their own, which is how this report came about, with funding from the Donella Meadows Institute.

Research Questions

Some of the questions we will attempt to answer are as follows: Could a public bank expand the current lending ability of the state’s lending agencies and community banks? What would be the risks, costs, and benefits to the state? What would be the impact on jobs, business, and the state economy? How would public bank returns compare to the existing returns on the state’s cash funds? How would it compare with direct use of the funds by the Treasurer for local investment? What is the current cost of money for state lending agencies and would this lower it? What are the risks of creating a public bank compared to systemic risks to state funds that are currently deposited in commercial banks or invested? What are the capitalization requirements for a public bank and are they feasible? What would be the impact on the state banking industry? We will investigate all these questions with a special focus on current financing agencies of the state including: 1. VEDA 2. VHFA 3. VSAC 4. State Capital Bonding

April 23, 2017

Phil Murphy, the leading Democratic candidate for governor of New Jersey, has made a state-owned bank a centerpiece of his campaign. He says the New Jersey bank would “take money out of Wall Street and put it to work for New Jersey – creating jobs and growing the economy [by] using state deposits to finance local investments … and … support billions of dollars of critical investments in infrastructure, small businesses, and student loans – saving our residents money and returning all profits to the taxpayers.”

A former Wall Street banker himself, Murphy knows how banking works. But in an April 7 op-ed in The New Jersey Spotlight, former New Jersey state treasurer Andrew Sidamon-Eristoff questioned the need for a state-owned bank and raised the issue of risk. This post is in response to those arguments, including a short refresher on the stellar model of the Bank of North Dakota (BND), currently the nation’s only state-owned depository bank.

Which Is Safer, a Public Bank or a Private Bank?

Sidamon-Eristoff warns, “[W]e need to remember that a public bank would be lending the state’s operating cash balances – we’re not talking about an enormous pool of unused, unencumbered cash – and that any repayment shortfalls or liquidity restrictions could potentially impact the availability of funds for employee salaries and other regular operating expenses.”

As the Bank of England recently confirmed, however, banks do not actually lend their deposits. The deposits at all times remain in the bank, available for withdrawal. They are no less available to the state when deposited in its own bank than in Bank of America. In fact, they are more at risk in Bank of America and other Wall Street banks, which with the repeal of Glass-Steagall are allowed to commingle their funds. That means they can gamble with their deposits in derivatives and other risky ventures, something a transparent and accountable state-owned bank would not be allowed to do.

Today, government deposits are at risk in private banks for another reason. Banks across the country are telling governments of all sizes that they can no longer provide the collateral required to fully protect these deposits while paying a competitive interest rate on them, due to heightened regulatory requirements. FDIC insurance covers only the first $250,000 of these deposits, a sum government revenues far exceed. The bulk of these deposits are thus left insufficiently protected against a banking collapse like that seen in 2008-09—something that is widely predicted to happen again.

In North Dakota, by contrast, state revenues are deposited by law in the state-owned Bank of North Dakota and are guaranteed by the state. The BND pays a competitive interest rate on these deposits that is generally at about the midpoint of rates paid by other banks in the state. The BND, in turn, guarantees municipal government deposits, which are generally reserved for local banks. Unlike in other states, where local banks must back public deposits with collateral to an extent that makes the funds largely unavailable for lending, North Dakota’s community banks are able to use their municipal government deposits to back loans because the BND provides letters of credit guaranteeing them.

The concern that a New Jersey state-owned bank might make risky loans can be obviated by limiting lending, at least initially, to the same sorts of loans the state makes now, using the same underwriting standards. Sidamon-Eristoff observes that “the state already maintains a comprehensive range of economic development, infrastructure finance, housing finance, and student assistance programs.” What financing through the state’s own bank would add is leverage. State and local governments routinely make loans through revolving funds, in which the money has to be there before it can be lent out and must come back before it is lent again. Chartered depository banks are allowed to leverage their capital into 10 times that sum (or more) in loans, acquiring the liquidity for withdrawals as needed from the wholesale markets (Fed funds, the repo market or the Federal Home Loan Banks). A bank with adequate capital will lend to any creditworthy borrower, without first checking its deposits or its reserves. If the bank has insufficient reserves, it can borrow from a variety of cheap sources that are normally the exclusive province of the banking club, but that local governments and communities can tap into by owning their own banks.

That is one of the major benefits to the state of having its own bank: it can borrow very cheaply in the money markets. It can get the sort of Wall Street perks not otherwise available to governments, businesses, or individuals; and it is backstopped by the Federal Reserve system if it runs short of funds. This is the magic that allows banks to be so profitable, and it is what makes a publicly-owned bank exceptionally useful at state and local levels of government.

Cutting the Cost of Infrastructure in Half

Consider the possibilities, for example, for funding infrastructure. Like most states today, New Jersey suffers from serious budget problems, limiting its ability to make needed improvements. By funding infrastructure through its own bank, the state can cut infrastructure costs roughly in half, since 50 percent of the cost of infrastructure, on average, is financing. Again, a state-owned bank can do this by leveraging its capital, with any shortfall covered very cheaply in the wholesale markets. In effect, the state can borrow at bankers’ rates of 1 percent or less, rather than at market rates of 4 to 6 percent for taxable infrastructure bonds (not to mention the roughly 12 percent return expected by private equity investors). The state can borrow at 1 percent and turn a profit even if it lends for local development at only 2 percent—one-half to two-thirds below bond market rates.

That is the rate at which North Dakota lends for infrastructure. In 2015, the state legislature established a BND Infrastructure Loan Fund program that made $150 million available to local communities for a wide variety of infrastructure needs. These loans have a 2 percent fixed interest rate and a term of up to 30 years; and the 2 percent goes back to the State of North Dakota, so it’s a win-win-win for local residents.

The BND is able to make these cheap loans while still turning a tidy profit because its costs are very low: no exorbitantly-paid executives; no bonuses, fees, or commissions; very low borrowing costs; no need for multiple branch offices; no FDIC insurance premiums; no private shareholders. Profits are recycled back into the bank, the state and the community.

In November 2014, The Wall Street Journal reported that the BND was actually more profitable than the largest Wall Street banks, with a return on equity that was 70 percent greater than for JPMorgan Chase and Goldman Sachs. This remarkable performance was attributed to the state’s oil boom; but the boom has now become an oil bust, yet the BND’s profits continue to climb. In its latest annual report, published in April 2016, the bank boasted its most profitable year ever. The BND has had record profits for the last 12 years, each year outperforming the last. In 2015 it reported $130.7 million in earnings, total assets of $7.4 billion, capital of $749 million, and a return on equity of a whopping 18.1 percent.

The BND Partners, Not Competes, with Local Banks

Sidamon-Eristoff argues that “a new public bank would inevitably compete against New Jersey’s private banks for routine business.” But the BND does not compete with private banks either for municipal deposits or for loans. Rather, it partners with local banks, participating in their loans. The local bank acts as the front office dealing directly with customers. The BND acts more like a “bankers’ bank,” helping with liquidity and capital requirements. By partnering with the BND, local banks can take on projects in which Wall Street has no interest, projects that might otherwise go unfunded, including loans for local infrastructure.

The BND helps local private banks in other ways. It acts as a mini-Fed for the state, providing correspondent banking services to virtually every financial institution in North Dakota. It offers secured and unsecured federal funds lines to over 100 financial institutions, along with check-clearing, cash management and automated clearing house services. Because it assists local banks with mortgages and guarantees their loans, local banks have been able to keep loans on their books rather than selling them to investors to meet capital requirements, allowing them to avoid the subprime and securitization debacles.

Due to this amicable relationship, the North Dakota Bankers’ Association endorses the BND as a partner rather than a competitor of the state’s private banks. Indeed, it may be the BND that ultimately saves local North Dakota banks from extinction as the number of banks in the US steadily shrinks. North Dakota has more banks per capita than any other state.

Bolstering the State’s Budget

The BND also helps directly with state government funding as needed. Between 2009 and 2016, the BND retained its profits because the state did not need them and the bank needed the additional capital for its rapidly expanding loan portfolio. But in December 2016, Governor Jack Dalrymple proposed returning $200 million from the bank’s profits to the state’s general fund, to help make up for a budget shortfall caused by collapsing oil and soybean proceeds. Dalrymple commented, “Our economic advisers have told us there is no similar state in the nation that could have weathered such a collapse in commodity prices without serious impacts on their financial condition.”

The BND also served as a rainy day fund when the state went over-budget in 2001-02 due to the dot-com bust. The bank simply declared an extra dividend for the state, and the next year the budget was back on track: no massive debt accumulation, no Wall Street bid-rigging, no fraudulent interest-rate swaps, no capital appreciation bonds at 300% interest.

Having a cheap and ready credit line with the state’s own bank can have similar benefits for New Jersey and other states. It can reduce the need for wasteful rainy-day funds invested at minimal interest in out-of-state banks; allow the state to leverage its funds, expanding its current credit facilities without adding to the state’s debt burden; cut infrastructure costs nearly in half; and jumpstart the economy with new development, new employment, and an expanded tax base.

As a society obsessed by money, we pay a gigantic price for not educating high school and college students about money and banking. The ways of the giant global banks – both commercial and investment operations – are as mysterious as they are damaging to the people. Big banks use the Federal Reserve to maximize their influence and profits. The federal Freedom of Information Act provides an exemption for matters that are “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.” This exemption allows financial institutions to wallow in secrecy. Financial institutions are so influential in Congress that Senator Durbin (D, IL) says “[The banks] frankly own this place.”

Although anti-union, giant financial institutions have significant influence over the investments of worker pension funds. Their certainty of being bailed out because they are seen as “too big to fail” harms the competitiveness of smaller, community banks and allows the big bankers to take bigger risks with “other people’s money,” as Justice Brandeis put it.

These big banks are so pervasive in their reach that even unions and progressive media, such as The Nation magazine and Democracy Now have their accounts with JP Morgan Chase.

The government allows banks to have concentrated power. Taxpayers and Consumers are charged excessive fees and paid paltry interest rates on savings. The bonds of municipalities are are also hit with staggering fees and public assets like highways and public drinking water systems are corporatized by Goldman Sachs and other privatizers with sweetheart multi-decade leases.

Then there are the immense taxpayer bailouts of Wall Street, such as those in2008-2009 after the financial industry’s recklessness and crimes brought down the economy, cost workers 8 million jobs, and shredded the pension and mutual fund savings of the American people.

Standing like a beacon of stability, responsiveness and profitability is the 98 year-old, state-owned Bank of North Dakota (BND). As reported by Ellen Brown, prolific author and founder of the Public Banking Institute (Santa Clarita, California), “The BND has had record profits for the last 12 years” (avoiding the Wall Street crash) “each year outperforming the last. In 2015 it reported $130.7 million in earnings, total assets of $7.4 billion, capital of $749 million, and a return on investment of a whopping 18.1 percent. Its lending portfolio grew by $486 million, a 12.7 percent increase, with growth in all four of its areas of concentration: agriculture, business, residential and student loans…”

North Dakota’s economy is depressed because of the sharp drop in oil prices. So the BND moved to help. Again, Ellen Brown:

“In 2015, it introduced new infrastructure programs to improve access to medical facilities, remodel or construct new schools, and build new road and water infrastructure. The Farm Financial Stability Loan was introduced to assist farmers affected by low commodity prices or below-average crop production. The BND also helped fund 300 new businesses.”

All this is in a state with half the population of Phoenix or Philadelphia.

A California coalition is forming to establish a state-owned bank for California. Coalition organizers say a California State Bank will cut the state’s long-term financing costs in half, compared to what avaricious Wall Street is charging. The nation’s largest state (equivalent to the world’s sixth largest economy) can free itself from massive debt accumulation, bid-rigging, deceptive interest-rate swaps and capital appreciation bonds at 300% interest over time.

What assets does the state have to make this bank fully operational? California has surplus funds which total about $600 billion, including those in a Pooled Money Investment account managed by the State Treasurer that contains $54 billion earning less than 1 percent interest.

Money in these funds is earmarked for specific expenditure purposes, but they can be invested – in a new state bank. To escape from a Wall Street that is, in Brown’s words “sucking massive sums in interest, fees and interest rate swap payments out of California and into offshore tax havens,” a state bank can use its impressive credit power to develop infrastructure in California.

Huge state pension funds and other state funds can provide the deposits. Each one billion dollar capital investment can lend $10 billion for projects less expensively and under open stable banking control by California. Presently, California and other states routinely deposit hundreds of billions of dollars in Wall Street banks at minimal interest, turn around and borrow for infrastructure construction and repair from the Wall Street bond market at much higher interest and fees.

This is a ridiculous form of debt peonage, a lesson Governor Jerry Brown has yet to learn. He and other officials similarly uninformed about how the state of California can be its own banker should visit publicbankinginstitute.org and read Ellen Brown’s book, The Public Bank Solution.

Legislation for public banks is being pursued in the states of Washington, Michigan, Arizona and New Jersey, as well as the cities of Philadelphia and Santa Fe. Look for county commissioners and state treasurers to come on board when they see the enormous safeguards and savings that can be secured through “public banks” in contrast to the convoluted casino run by unaccountable Wall Street gamblers and speculators.

A longtime backer of public banking, retired entrepreneur Richard Mazess, hopes that national civic groups like Public Citizen, Common Cause, People for the American Way and Consumer Watchdog can get behind the proposal. “Public, not private, infrastructure is essential for an equitable economy,” he says.

California already has a public infrastructure bank called the IBank. Mr. Mazess and others believe that expanding the existing IBank into a depository institution would be more likely to pass through the California legislature. The deposits would come from public institutions, and NGOs (not from private persons). These pension funds and other public deposits would become reserves and serve as the basis for safely leveraged loans to public projects at a conservative tenfold multiplier. No derivatives or other shenanigans allowed.

Before that proposal can be enacted, however, there needs to be much more education of state legislators and the public at large.

Such enlightenment would illuminate the enormous savings, along with the restoration of state sovereignty from the absentee, exploitative grip of an unrepentant, speculating, profiteering Wall Street that believes it can always go to Washington, DC for its taxpayer bailouts.

April 12, 2017

Phil Murphy, the leading Democratic candidate for governor of New Jersey, has made a state-owned bank a centerpiece of his campaign. He says the New Jersey bank would “take money out of Wall Street and put it to work for New Jersey – creating jobs and growing the economy [by] using state deposits to finance local investments … and … support billions of dollars of critical investments in infrastructure, small businesses, and student loans – saving our residents money and returning all profits to the taxpayers.”

A former Wall Street banker himself, Murphy knows how banking works. But in an April 7 op-ed in The New Jersey Spotlight, former New Jersey state treasurer Andrew Sidamon-Eristoff questioned the need for a state-owned bank and raised the issue of risk. This post is in response to those arguments, including a short refresher on the stellar model of the Bank of North Dakota (BND), currently the nation’s only state-owned depository bank.

Which Is Safer, a Public Bank or a Private Bank?

Sidamon-Eristoff warns, “[W]e need to remember that a public bank would be lending the state’s operating cash balances – we’re not talking about an enormous pool of unused, unencumbered cash – and that any repayment shortfalls or liquidity restrictions could potentially impact the availability of funds for employee salaries and other regular operating expenses.”

As the Bank of England recently confirmed, however, banks do not actually lend their deposits. The deposits at all times remain in the bank, available for withdrawal. They are no less available to the state when deposited in its own bank than in Bank of America. In fact, they are more at risk in Bank of America and other Wall Street banks, which with the repeal of Glass-Steagall are allowed to commingle their funds. That means they can gamble with their deposits in derivatives and other risky ventures, something a transparent and accountable state-owned bank would not be allowed to do.

Today, government deposits are at risk in private banks for another reason. Banks across the country are telling governments of all sizes that they can no longer provide the collateral required to fully protect these deposits while paying a competitive interest rate on them, due to heightened regulatory requirements. FDIC insurance covers only the first $250,000 of these deposits, a sum government revenues far exceed. The bulk of these deposits are thus left insufficiently protected against a banking collapse like that seen in 2008-09—something that is widely predicted to happen again.

In North Dakota, by contrast, state revenues are deposited by law in the state-owned Bank of North Dakota and are guaranteed by the state. The BND pays a competitive interest rate on these deposits that is generally at about the midpoint of rates paid by other banks in the state. The BND, in turn, guarantees municipal government deposits, which are generally reserved for local banks. Unlike in other states, where local banks must back public deposits with collateral to an extent that makes the funds largely unavailable for lending, North Dakota’s community banks are able to use their municipal government deposits to back loans because the BND provides letters of credit guaranteeing them.

The concern that a New Jersey state-owned bank might make risky loans can be obviated by limiting lending, at least initially, to the same sorts of loans the state makes now, using the same underwriting standards. Sidamon-Eristoff observes that “the state already maintains a comprehensive range of economic development, infrastructure finance, housing finance, and student assistance programs.” What financing through the state’s own bank would add is leverage. State and local governments routinely make loans through revolving funds, in which the money has to be there before it can be lent out and must come back before it is lent again. Chartered depository banks are allowed to leverage their capital into 10 times that sum (or more) in loans, acquiring the liquidity for withdrawals as needed from the wholesale markets (Fed funds, the repo market or the Federal Home Loan Banks). A bank with adequate capital will lend to any creditworthy borrower, without first checking its deposits or its reserves. If the bank has insufficient reserves, it can borrow from a variety of cheap sources that are normally the exclusive province of the banking club, but that local governments and communities can tap into by owning their own banks.

That is one of the major benefits to the state of having its own bank: it can borrow very cheaply in the money markets. It can get the sort of Wall Street perks not otherwise available to governments, businesses, or individuals; and it is backstopped by the Federal Reserve system if it runs short of funds. This is the magic that allows banks to be so profitable, and it is what makes a publicly-owned bank exceptionally useful at state and local levels of government.

Cutting the Cost of Infrastructure in Half

Consider the possibilities, for example, for funding infrastructure. Like most states today, New Jersey suffers from serious budget problems, limiting its ability to make needed improvements. By funding infrastructure through its own bank, the state can cut infrastructure costs roughly in half, since 50 percent of the cost of infrastructure, on average, is financing. Again, a state-owned bank can do this by leveraging its capital, with any shortfall covered very cheaply in the wholesale markets. In effect, the state can borrow at bankers’ rates of 1 percent or less, rather than at market rates of 4 to 6 percent for taxable infrastructure bonds (not to mention the roughly 12 percent return expected by private equity investors). The state can borrow at 1 percent and turn a profit even if it lends for local development at only 2 percent—one-half to two-thirds below bond market rates.

That is the rate at which North Dakota lends for infrastructure. In 2015, the state legislature established a BND Infrastructure Loan Fund program that made $150 million available to local communities for a wide variety of infrastructure needs. These loans have a 2 percent fixed interest rate and a term of up to 30 years; and the 2 percent goes back to the State of North Dakota, so it’s a win-win-win for local residents.

The BND is able to make these cheap loans while still turning a tidy profit because its costs are very low: no exorbitantly-paid executives; no bonuses, fees, or commissions; very low borrowing costs; no need for multiple branch offices; no FDIC insurance premiums; no private shareholders. Profits are recycled back into the bank, the state and the community.

In November 2014, The Wall Street Journal reported that the BND was actually more profitable than the largest Wall Street banks, with a return on equity that was 70 percent greater than for JPMorgan Chase and Goldman Sachs. This remarkable performance was attributed to the state’s oil boom; but the boom has now become an oil bust, yet the BND’s profits continue to climb. In its latest annual report, published in April 2016, the bank boasted its most profitable year ever. The BND has had record profits for the last 12 years, each year outperforming the last. In 2015 it reported $130.7 million in earnings, total assets of $7.4 billion, capital of $749 million, and a return on equity of a whopping 18.1 percent.

The BND Partners, Not Competes, with Local Banks

Sidamon-Eristoff argues that “a new public bank would inevitably compete against New Jersey’s private banks for routine business.” But the BND does not compete with private banks either for municipal deposits or for loans. Rather, it partners with local banks, participating in their loans. The local bank acts as the front office dealing directly with customers. The BND acts more like a “bankers’ bank,” helping with liquidity and capital requirements. By partnering with the BND, local banks can take on projects in which Wall Street has no interest, projects that might otherwise go unfunded, including loans for local infrastructure.

The BND helps local private banks in other ways. It acts as a mini-Fed for the state, providing correspondent banking services to virtually every financial institution in North Dakota. It offers secured and unsecured federal funds lines to over 100 financial institutions, along with check-clearing, cash management and automated clearing house services. Because it assists local banks with mortgages and guarantees their loans, local banks have been able to keep loans on their books rather than selling them to investors to meet capital requirements, allowing them to avoid the subprime and securitization debacles.

Due to this amicable relationship, the North Dakota Bankers’ Association endorses the BND as a partner rather than a competitor of the state’s private banks. Indeed, it may be the BND that ultimately saves local North Dakota banks from extinction as the number of banks in the US steadily shrinks. North Dakota has more banks per capita than any other state.

Bolstering the State’s Budget

The BND also helps directly with state government funding as needed. Between 2009 and 2016, the BND retained its profits because the state did not need them and the bank needed the additional capital for its rapidly expanding loan portfolio. But in December 2016, Governor Jack Dalrymple proposed returning $200 million from the bank’s profits to the state’s general fund, to help make up for a budget shortfall caused by collapsing oil and soybean proceeds. Dalrymple commented, “Our economic advisers have told us there is no similar state in the nation that could have weathered such a collapse in commodity prices without serious impacts on their financial condition.”

The BND also served as a rainy day fund when the state went over-budget in 2001-02 due to the dot-com bust. The bank simply declared an extra dividend for the state, and the next year the budget was back on track: no massive debt accumulation, no Wall Street bid-rigging, no fraudulent interest-rate swaps, no capital appreciation bonds at 300% interest.

Having a cheap and ready credit line with the state’s own bank can have similar benefits for New Jersey and other states. It can reduce the need for wasteful rainy-day funds invested at minimal interest in out-of-state banks; allow the state to leverage its funds, expanding its current credit facilities without adding to the state’s debt burden; cut infrastructure costs nearly in half; and jumpstart the economy with new development, new employment, and an expanded tax base.

March 07, 2017

Alarmed by the corruption and greed of Wall Street, many US cities and states are studying the feasibility of establishing public banks. Public banks are owned by cities, states or other jurisdictions and serve to keep funds local instead of being deposited on Wall Street. The funds are then used to support local economic activities like small business loans and student loans.

Washington state has already cut its ties with Wells Fargo because they funded DAPL. Now they want to get rid of Wall Street as a place to park their money making use of the local economy and profiting the people of Washington instead of the bankers of Wall Street. Bills were introduced on January 18 in both the House and Senate of the Washington State Legislature that add Washington to the growing number of states now actively moving to create public banking facilities.

Ellen Brown, author of Web of Debt and The Public Banking Solution writes:

The bills, House Bill 1320 and Senate Bill 5238, propose creation of a Washington Investment Trust (WIT) to “promote agriculture, education, community development, economic development, housing, and industry” by using “the resources of the people of Washington State within the state.”

Currently, all the state’s funds are deposited with Bank of America. HB 1320 proposes that, in the future, “all state funds be deposited in the Washington Investment Trust and be guaranteed by the state and used to promote the common good and public benefit of all the people and their businesses within [the] state.”

The legislation is similar to that now being studied or proposed in states including Illinois, Virginia, Hawaii, Massachusetts, Maryland, Florida, Michigan, Oregon, California and others.

Santa Fe, NM Considers Public Bank as Trump Threatens to Take Away Funding for Sanctuary Cities

The Mayor of Santa Fe, New Mexico has declared his city to be a sanctuary city in which case Trump has threatened to deny Federal monies to the city. The Mayor noted that Santa Fe had welcomed immigrants for over 400 years. A public bank could replace that funding:

If McEvers [interviewer from NPR] had asked what possible sources of funding might replace the money Trump is threatening to take away, Gonzales might have answered that Santa Fe was in the advanced stages of considering the creation of a publicly owned bank. In late October, three City Council members introduced a resolution to take the “final steps to determine” whether a public bank would be feasible. Earlier in 2016, a local advocacy group named Banking on New Mexico released a five-year model projecting that a Santa Fe bank could reduce debt service costs by $1 million a year and earn an annual profit, netting the city over $10 million in the bank’s first five years. While that wouldn’t completely offset funds the new administration is threatening to withhold, it would put the city in better shape to absorb the loss and begin the process of building an autonomous local economy that over time could transcend much of the need for federal dollars.

RESOLUTION DIRECTING THE CITY ADMINISTRATOR TO PREPAREAN INFORMATIONAL REPORT WITH THE COST ESTIMATES OFCOMMISSIONING A STUDY ANALYZING THE FEASIBILITY ANDECONOMIC IMPACT OF ESTABLISHING A PUBLIC BANK FOR ORINCLUDING THE CITY OF OAKLAND, AND PROVIDING FUNDINGOPTIONS FOR THE FEASIBILITY STUDY, INCLUDING THE OPTIONOF ALLOCATING TO THE STUDY ANY REMAINDER OF THE MONEYTHAT WAS BUDGETED FOR THE GOLDMAN SACHS DEBARMENTPROCEEDINGS.

WHEREAS, a public bank can have investment priorities that focus on the creation of jobs in Oakland that spur local economic growth by providing affordable credit to small and medium-sized businesses that have been historically ignored by the larger, more established banks; and

WHEREAS, a public bank can have investment priorities that center on providing loans for low and moderate income housing to help relieve the current housing crisis facing Oakland; and

WHEREAS, a public bank can have investment priorities that provide loans for energy conservation, installation of solar panels and measures for conserving water in Oakland; and

WHEREAS, there is a desire for local funding solutions that reinvest public funds in the local community; and

WHEREAS, public banking operates in the public interest, through institutions owned by the people through their representative governments; and

WHEREAS, public banks are able to return revenue to the community and can provide low-cost financing in support of City policies; and

WHEREAS, on September 8, 2016, Wells Fargo bank was fined $185 million for fraudulently opening up accounts without customers' consent, which then damaged customers' credit scores and caused customers to be charged illegal banking fees; and

WHEREAS, on May 20, 2015, Citigroup Inc. and JP Morgan Chase & Co. agreed to plead guilty to felony charges for conspiring to manipulate the price of U.S. dollars and euros exchanged in the foreign currency exchange spot market; and

WHEREAS, on May 20, 2015, Citigroup Inc. agreed to pay a criminal fine of $945 million and JP Morgan Chase & Co. agreed to pay a criminal fine of $550, for illegally manipulating the foreign exchange market; and

WHEREAS, on May 20, 2015, the Federal Reserve announced that it was imposing a separate set of fines on Citigroup, Inc. and JP Morgan Chase & Co. of $342 million for their illegal practices in the foreign exchange markets; and

WHEREAS, on March 9th, 2016, the Wall Street Journal reported that Wall Street banks had paid in total more than $100 billion in fines and penalties for mortgage-related fraud, and

WHEREAS, said Wall Street banks' criminal conduct and wrongful behavior should not be rewarded with future business dealings with Oakland; and

WHEREAS, the City of Oakland is tasked with holding and protecting the fundamental interest of the public as well as the financial well being of the City; now, therefore be it

RESOLVED: That the Oakland City Council directs the City Administrator, or his/her designee, to prepare an informational report with the cost estimates of commissioning experts in public banking to conduct a study analyzing the feasibility and economic impact of establishing a public bank for the City of Oakland;

Please note that these are only a few of the "Whereas's". There's more.

Profits to the People

Currently, the Bank of North Dakota (BND) is the only public bank in the country. All other states and cities deposit their revenues and pension funds with Wall Street with the profits going to Wall Street. That's why so many states are in dire straits while North Dakota's fiscal situation is just fine.

[A]lmost everywhere the fiscal crisis of states has grown more acute. Rainy day funds are drained, cities and towns have laid off more than 200,000 people, and Arizona even has leased out its state office building…

“It’s the time of the once unthinkable,” noted Lori Grange, deputy director of the Pew Center on the States. “Whether there are tax increases or dramatic cuts to education and vital services, the crisis is bad.”

Is it any wonder that President Pussy Grabber and his Republican cohorts are calling for the privatization of everything? Their mantra is that government is incompetent when the true fault lies in the fact that states and municipalities are being bled to death by Wall Street. Wall Street banks borrow money from the Fed at zero percent interest and then loan it to municipalities at 5% interest. That profit could go to the municipalities. The antidote for that is to establish a public bank from which profits will flow to the people as they have in North Dakota. Local control of local money should be the mantra.

There is a move in Congress to let states go bankrupt the way many US cities have. For instance, San Bernardino, CA; Stockton, CA; Orange County, CA; Jefferson County, AL; and Detroit, MI have all declared bankruptcy with the result that concomitant pension fund and contractual obligations to unions and others have gone by the wayside. While those and other cities have been drained by the Wall Street banking crisis which resulted in increased borrowing costs and loss of revenues, BND and North Dakota have churned along quite nicely, thank you very much. They have provided low cost affordable loans to small businesses and students, thus totally averting the worst effects that most cities and states which rely on Wall Street have suffered.

BND provides back-up for local private banks by offering check clearing services and liquidity support. They invest in North Dakota municipal bonds to provide economic development. In the last ten years, the BND has returned more than a third of a billion dollars to the state’s general fund. North Dakota is one of the few states to consistently post a budget surplus.

Washington State Representative Bob Hasegawa, a prime sponsor of the Washington legislation, called the proposal for a publicly-owned bank “a simple concept that will reap huge benefits for Washington.” In a letter to constituents, he explained, “The concept (is) to keep taxpayers’ money working here in Washington to build our economy. Currently, all tax revenues go into a ‘Concentration Account’ held by the Bank of America. BoA makes money off our money and we never see those profits again. Instead, we can create our own institution and keep taxpayers’ dollars here in Washington, working for Washington.”

Dennis Ortblad writes in the Seattle Times: "In fact, we propose a public bank in Washington that lends primarily to public institutions — such as school districts, affordable housing programs, public utilities — in order to reduce the state’s or a municipality’s reliance on the expensive bonds and fees in Wall Street markets." While President Pussy Grabber, Betsy DeVos and Repubs in general want to privatize everything, a public bank would help to shore up public enterprises like the public school system and local infrastructure. BND has a sterling credit record and earned for the state $130 million in 2015 alone, with total assets of $7.4 billion (its 12th consecutive year of record profits for the people of the state). That $130 million would have gone to Wall Street in any other state.

The US banking system including its central bank, the Federal Reserve, is privately owned. Is it any wonder that during the banking crisis of 2008, the first and only order of business was to bail out the banks, not homeowners who were over due in their mortgages? They were hung out to dry despite the fact that many were told the bank would "help" them either by lowering interest rates, refinancing or forgiving principle in "underwater" mortgages. A public banking system is beholden not to private interests but to the people of the state or city in which it's registered.

The Seattle City Council has unanimously voted to end the city's relationship with Wells Fargo over the bank's financing of the Dakota Access Pipeline (DAPL), its financing of private prison companies, and a regulatory scandal involving the bank's creation of two million unauthorized accounts.

All nine council members voted to take $3 billion of city funds away from the bank after Seattle's current contract expires in 2018. The vote occurred just hours after the Army notified Congress that it will be granting an easement allowing DAPL builders to drill under the Missouri River following a presidential memo from Donald Trump.

That $3 billion could find a home in a Seattle or Washington state public bank when one becomes available. All they have to do is mimic North Dakota's public bank which has been working well for over 100 years. The Public Banking Institute is working on a model which could be replicated in cities and states throughout the US. All city council members would have to do is to vote to replicate the model.

One Seattle City Council member who is determined to bring about a public bank is Kshama Sawant. She is an American socialist politician, activist and member of the Socialist Alternative. A former software engineer, Sawant became a socialist activist and part-time economics instructor in Seattle after immigrating to the United States. Sawant ran unsuccessfully for the Washington House of Representatives before winning her seat on the Seattle City Council. Sawant was the first socialist to win a city-wide election in Seattle since Anna Louise Strong was elected to the School Board in 1916. Socialist Alternative describes itself as "a community of activists fighting against budget cuts in public services; fighting for living wage jobs and militant, democratic unions; and people of all colors speaking out against racism and attacks on immigrants, students organizing against tuition hikes and war, women and men fighting sexism and homophobia."

A public bank could cut the cost of building public schools in Washington in half. Half the cost of building new schools is in interest paid to banks and bondholders. That would all come back to state or city coffers depending on whether the schools were financed by a state or city public bank.

Cut spending, fire teachers, raise taxes—these are the solutions always proposed to offset Washington State’s budget deficits. The state’s budget crises do not arise from too much spending or too little taxation on the poor and middle class. Instead, since 2000, corporate tax breaks in Washington State have more than doubled. The state simply isn't getting enough tax revenue from corporations (see: realwashingtonstatebudget.info).

Also, since the 2008 financial market collapse, banks have cut back on lending. When small local businesses can't secure low interest loans, there are lay-offs and business closures in the private sector, which also cause state revenues to plummet. To solve this problem, since 2010, 17 states, including Washington State, have drafted legislation to establish public banks based on the successful Bank of North Dakota.

A Public Bank for Cities in San Diego County

There is a local movement to create a public bank in San Diego. A group has been meeting regularly and is studying the possibilities for several cities within San Diego County. They are meeting with Council people and hope to use the Oakland Resolution cited partially above as a first step in getting the ball rolling.

Notwithstanding some setbacks and some attrition of the ranks, our courageous group continues to fight for banking reform and the creation of public banks throughout California. We have been encouraged by the recent success in Oakland with the unanimous approval of the Public Banking Resolution by their City Council. It gives us hope! We need referrals to the mayors, city Council members and finance directors for the 18 incorporated cities in San Diego County to stop our money from flowing to Wall Street!

If you are interested in getting involved with the public banking movement in San Diego County, contact Ian Mackenzie at 858-279-4370 or ianmackenzie24@gmail.com.

May 01, 2016

In the City of Palo Alto, if you make less than $250,000 a year, you're eligible for a housing subsidy. The city council has voted to study a housing proposal that would essentially subsidize new housing for what qualifies as middle-class nowadays, families making from $150,000 to $250,000 a year.

Here in San Diego the situation is not much better as teachers, police and government workers cannot afford to live in the city they work in. So if middle class, college educated professionals can't afford to live here, how can anyone else lower on the economic ladder afford to live here either? In particular those on the bottom most rung, the homeless, can't even afford a foot in the door.

This report finds that nearly 50% of San Diegans face housing affordability challenges in rentals and homeownership, and over 70% of San Diegans are priced out of the homeownership market....

The City of San Diego is one of the most unaffordable housing markets in the nation. Zillow recently surveyed nearly 300 cities and found San Diego to be one of the most unaffordable six markets in the United States. Both renting and owning in San Diego are increasingly out of reach for average families. The average home price in San Diego is $506,000 according to Zillow – affordable only with an income over $80,000 per year. The average two-bedroom rental in San Diego is $1820 per month, affordable only with an income of $72,800 per year. ...

San Diego’s median income is approximately $73,000 for the city, which is consistent with our estimate that about half of San Diegans are unable to afford a minimally sized unit. A minimal unit would be priced at approximately $400,000 based on current San Diego home prices.

Translating the affordability challenge into wages, the Low Income Housing Coalition estimates that nationally, in order to afford a modest, two-bedroom apartment in the U.S., renters need to earn a wage of $19.35 per hour.

Good luck with that as minimum wage workers will be making $15 an hour 6 years from now and still will not be able to afford a modest two bedroom apartment, that is if rental prices do not go up in the meantime! Fat chance of that. SANDAG estimates that, as the production of new housing falls behind, only 6% of the housing that is being constructed is for people with low incomes. Obviously, there's more money to be made by building housing for upper income people.

The report continues: "As of 2013 there were approximately 120,000 extremely low-income families and only 20,000 affordable units available for them in San Diego. The pace of new construction for very low income, low income and moderate-income units is lagging severely behind the estimated need in San Diego ..." To say the least!

It doesn't have to be this way. The City has squirreled away millions of dollars in off budget funds which could be used for affordable housing and housing for the homeless. Besides that the City of San Diego owns numerous parcels of land on which affordable housing including housing for the homeless could be built. Since they're not recognizing the emergency situation that lack of housing represents, they are actually in violation of a state mandate, Senate Bill 2 from 2007, authored by Senator Cedillo which stated the following:

This bill would add emergency shelters to these provisions, as specified, and would add provisions to the housing element that would require a local government to identify a zone or zones where emergency shelters are allowed as a permitted use without a conditional use or other discretionary permit. ... By increasing the duties of local public officials, the bill would create a state-mandated local program.

That was 9 years ago and the City of San Diego has done nothing about it. This bill "create[s] a state-mandated local program." Still the City insists that emergency housing like the Tiny Homes project requires a Conditional Use Permit (CUP). No it doesn't! The corner of 17th Street and Imperial Avenue is identified on a 2006 general plan map as one of many locations that the city has deemed suitable for emergency shelters. Yet Arian Collins, supervising public information officer for the City of San Diego, said a conditional use permit (CUP) would be needed to put shelters on any of the sites identified in the map. Has he read SB-2 Cedillo which says that, for zones where emergency shelters are allowed, there is no need for a CUP? Are these people dumb or ignorant or they just don't care?

San Diego Has the Money to Build Affordable Housing

Civil engineer Katheryn Rhodes has identified several funds where the City, the County, the San Diego Housing Commission and Civic San Diego are hoarding cash that could be used for emergency shelters and/or affordable housing or even pay for Emergency Shelter Tents and Tenant Based Rental Assistance (TBRA) Housing Vouchers. There's $28.7 million in the Low and Moderate Income Housing Asset Fund (LMIHAF). There's also $259 million in long term assets that can be leveraged by using it as collateral and issuing bonds for much more. So why is the City contemplating issuing over a billion dollars in bonds for a new "Convadium" which, by the way is an architectural monstrosity with a convention center in the basement of a football field, when it is not doing its duty as mandated by the state of California to build emergency shelters for the homeless and affordable housing?

The Successor Agency (SA) to the Center City Development Corporation (CCDC) which facilitated the building of high rise condos in downtown San Diego by private developers has a lot of money at its disposal that's not being used that could be used to build affordable housing. According to Katheryn, they have $66,907,786 in unencumbered bonds plus $3,369,053 in reserves and $21,727,112 in other fund accounts. The Successor Agency cash can be used for any Capital Improvement Projects (CIP) and infrastructure projects including Affordable Housing with the approval of the City Council. Why won't the City Council take action?

The SA evidently is continuing the massive corruption of the CCDC that resulted in using HUD funds for building luxury condos that should have been used for building low income and affordable housing. CCDC President Nancy Graham was taking money from developers who were building the luxury condos tearing down Single Room Occupancy (SRO) hotels that housed many who have become homeless in the process.

Rusty Bee saw a direct connection between the tearing down of inexpensive housing units downtown, the augmentation of the homeless population and the investment buying of luxury high rises that weren't even occupied:

Twenty years in now, hundreds of downtown hotels razed making more people homeless, thousands of apartments and condos still empty, and when and where do the voodoo economics stop? The joke is that San Diego now has a million downtown condos that nobody is stupid enough to buy.

CCDC corruption which involved using money to renovate "blighted" areas to build luxury high rises instead of building affordable housing resulted in the termination of CCDC and "redevelopment." That's why there's a "Successor Agency" which in reality folks is the City Council which has turned over the winding down of CCDC activities to Civic San Diego. Now Civic San Diego has the cash to build affordable housing so why isn't it doing it?

The Capital Outlay Fund has a Cash Reserve Fund Balance of $125,729,000 as of June 30, 2015. When properties are sold, normally any cash money from the sale goes into the Capital Outlay Fund. The Balance in FY-2014 was $40,878,000. The balance in FY-2013 was $35,775,000. So it's building up with no purpose in mind. Money is just being hoarded.

The FY-2015 Comprehensive Annual Financial Report (CAFR) shows a Public Facilities Financing Authority (PFFA) Cash Reserve Fund Balance of $170,448,000. In FY-2014 it was $90,397,000, and in FY-2013 it was $93,902,000 so it too is building up with no purpose in mind. This does not even take into account JPA bonds. So there is plenty of money that could be used for affordable housing and emergency housing for the homeless. If San Diego wanted to get them off the streets, they could take action to do so tomorrow.

The Mayor's Budget

In his new budget released the other day, Mayor Kevin Faulconer did not even mention affordable housing, and gave only lip service to homelessness. There is something in there about housing 1000 homeless veterans, but what about the tens of thousands of homeless mothers and children? There's something in there about providing 24/7 access to restrooms for the homeless and getting serial inebriates off the street, but these are drops in the bucket compared to what needs to be done. The proposed FY 2017 budget calls for no expenditures from the Capital Outlay Fund which could be used for affordable housing. There is likewise no expenditure called for from the PFFA Funds. However, the budget does call for spending over $17 million on golf courses.

The San Diego Housing Commission (SDHC) budget, which is separate from the City's budget, can be found here. From their website it sounds like the SDHC is doing a lot about affordable housing. The question is are they doing all they can and are they using all available resources to do it?

This is from Civic San Diego's website which is also separate from the City's budget:

"Since CCDC's (now CivicSD) inception in 1975, more than 3,500 affordable housing units have been created in downtown neighborhoods, using redevelopment funds, and more than 450 units are in the pipeline. To date, $130 million in downtown redevelopment funds have been invested to produce affordable housing downtown. An additional $38 million have [sic] been committed for projects currently in the pipeline."

This all looks good on paper, but then why are there still so many homeless and the numbers are only getting larger? The City Council promptly approved Mayor Faulconer's budget, and it will take effect July 1.

San Diego Has Land It Could Build Affordable Housing On

Not only is the money available, land is available as well. The City of San Diego owns several parcels of land on which affordable housing could be built. But instead of doing that, the City wants to sell the land and place the proceeds in the Capital Outlay Fund, another Fund where money is accumulating with no declared purpose in mind.

The City's Real Estate Asset Department (READ) is supposed to ask the public if there are potential uses for surplus property owned by the City, but so far it has failed to do so. At the Committee for Smart Growth and Land Use meeting on February 16, 2016, the items on the agenda were all about selling off surplus parcels, not asking the public if there were alternative uses for them like building affordable housing.

The Legislature reaffirms its declaration that housing is of vital statewide importance to the health, safety, and welfare of the residents of this state and that provision of a decent home and a suitable living environment for every Californian is a priority of the highest order. The Legislature further declares that there is a shortage of sites available for housing for persons and families of low and moderate income and that surplus government land, prior to disposition, should be made available for that purpose.

Did they? Hell, no. For example, the property at the SE corner of Jamacha and Cardiff has been cleared for sale in accordance with California Government Code Section 54220. City departments were also notified and given an opportunity to retain the property. No City department has any current or foreseeable use for the property and the property has been determined to be excess to the City’s needs. So why isn't the property being used to build affordable housing? And there are tons of other city owned properties that the City doesn't need that could be used for this purpose as well.

Want to know more? Contact Mary Carlson, Asset Manager of READ. I couldn't find any contact information for her. Maybe that's intentional. Their website isn't very informative either. Nothing about all these properties they're trying to sell off to investors at fire sale prices.

There are currently 28 properties throughout the City up for sale. ...

READ is required by State Law to offer the property to internal and external agencies for a minimum 60 day period to see if they have interest in purchasing or leasing the property to provide low income housing, park and recreation or open space purposes, school facilities construction or use by a school district for open space purposes or for enterprise zone purposes if located in such a zone.

The READ files reviewed last December did not include a reply from the Parks and Open Space Department to the READ email sent July 16, 2013 initiating the for sale proposal. The noticing email basically said if we don’t hear from you in 60 days, we are proceeding with the sale.

It is getting pretty obvious that READ would rather offer the properties to rich investors and developers and pay realtor commissions than to have them developed for affordable housing or parks. By the way who picks the lucky realtors who have commissions falling into their laps like manna from heaven?

Murtaza Baxamusa, PhD, AICP, is the Director of Planning and Development for the San Diego County Building and Construction Trades Council Family Housing Corporation, said:

America’s Finest City has an ugly problem.

The homeless population in San Diego is among the four largest in the nation and getting worse, with over 8,700 people living without shelter. [Actually several times that amount; that's just the "official" count.] And while this kind of weather is rare in San Diego, it is not new, yet even after anticipating the storm for months and knowing the severity of our homelessness problem, there was marginal galvanization of resources by local government. Simultaneously, the city was able to commit hundreds of millions of dollars in public funds for supporting downtown development with an expanded convention center and a Chargers stadium that the NFL does not want, all of which will likely be built in the very neighborhood these people call home.

December 08, 2015

Income and wealth inequality is only getting worse. It's not hard to understand why. Certain corporations have a lock on economic activity throughout the world. Mom and Pop operations have been forced out of business or have merged with the Big Guys. Artificial intelligence, automation, robots and computers have taken over many menial but used-to-be-better-than-minimum-wage jobs like check-out clerks, bank tellers and customer service operators. Other jobs have been off shored to cheaper labor jurisdictions.

The rest of us, college graduates included, have been reduced to being expendable appendages of the large corporate machines to be sucked in and spit out at their pleasure. When our skill sets are outmoded, we will be laid off and fresh talent will be acquired. The job pool is shrinking because the number of necessary jobs is shrinking. Today, there are approximately 1.2 million fewer jobs in mid-and higher-wage industries than there were prior to the 2008 recession, while there are 2.3 million more jobs in lower-wage industries. According to the Bureau of Labor Statistics most jobs in the next decade won't even require a college education. They are jobs that can't be done by robots: care givers, nurses, house cleaners, gardeners, retail.

Another reason for income and wealth inequality is that the US Federal Reserve's quantitative easing policy screws savers who get zero interest on their life savings while injecting money into the largest Wall Street banks. This money is siphoned off by wealthy investors and hedge funds. It never enters the real economy. It only encourages the average Joes and Janes to take on more debt. Ninty percent of the money supply is created by private banks who loan money into the economy through their policy of fractional reserve banking. As the money supply increases, so does debt.

Wall Street Banking Giants Create Most of the US Money Supply

Fractional reserve banking is a simple concept that has become more complicated and convoluted as it has evolved over the years. In its simplest terms, if a bank takes in a deposit of $100 from 10 people or $1000 total, it loans out $900 of that keeping $100 back as a reserve in case someone wants their deposit back before the principal and interest on the loans start flowing in. Their premise is that not everyone will demand their deposit back at the same time. If, however, everyone does want their money back at the same time, there could be a run on the bank unless the bank can borrow the money from some other entity like another bank or the Federal Reserve

Thus money is created by the bank with a few keystrokes on a computer and is fed into the economy as debt. The banks are at the top of the food chain since they create the money and loan it out on interest. Thus the US economy is a debt based economy. Bad things happen when people all demand their money back at the same time or collective debt becomes so big and untenable that it can't be paid back. This is what happened in the 2008 financial crisis when mortgages were given to people who couldn't pay them back and hence defaulted. Eventually this whole financial structure, which was a house built upon sand instead of a rock, to use a Biblical metaphor, collapsed.

It is to be noted that when a bank creates money, it is not backed by gold. Nixon took us off the gold standard in 1971. Money not based on anything but the government's say so is called fiat money. Thus all money created by private banks is fiat money, and, although the government says it is all good, it is the private banks that actually create it, not the supposedly democratically elected government.

The Federal Reserve has also been involved in money creation recently with a process called quantitative easing (QE). When the government needs money beyond the revenues it takes in by means of taxes, it goes into debt by issuing bonds. Sometimes those bonds are bought by Joe and Jane Average Investor or sometimes by other countries like Japan. However, much of the time they are bought by Wall Street banks. Then the Federal Reserve turns around and pays cash for those bonds taking them off the hands of the big banks. The result is that the banks end up with more money and the loans disappear on the Federal Reserve's balance sheet which is sort of like a black hole. Effectively, the government never has to pay those loans back.

Quantitative Easing for the People

There is another way that money could be created and injected into the economy. It might be called quantitative easing for the people (PQE) as Britain's Leader of the Labor Party, Jeremy Corbyn has termed it. He proposes to give the Bank of England a new mandate to upgrade the economy to invest in new large scale housing, energy, transport and digital projects. The investments would be made through a National Investment Bank set up to invest in new infrastructure and in the hi-tech innovative industries of the future.

The money creation (or printing if you like) would entail the government issuing a bond that a National Investment Bank would buy. Then the central bank would take that loan on its balance sheet in return for cash that the bank would then use to pay for infrastructure. The end result is that the government would owe the central bank the amount of the loan, but because the central bank is a financial black hole, it would never have to pay.

In Addition to Pocketing the QE, Wall Street Bankrupts Cities

The City of Los Angeles is paying a Wall Street bank $200. million annually in fees just to manage its money. The Huffington Post revealed:

LOS ANGELES, CA- At a lively downtown rally in front of the Bank of NY Mellon in Los Angeles, the Fix LA Coalition unveiled a groundbreaking research report, entitled "No Small Fees: LA Spends More on Wall Street than Our Streets," revealing that Wall Street charges the City of Los Angeles more than $200 million in fees. Coalition members called for action to reduce the high fees and put that money back into neighborhood services. After the rally, Fix LA Coalition members delivered the report to elected officials in City Hall.

In addition LA like a lot of cities that have gone bankrupt (Birmingham, Alabama for instance) has been snookered into interest rate swaps that end up costing much more money than if they had kept the original loan at the original rate. Then to get out of these toxic deals, they have to pay a substantial "termination fee."

Lisa Cody, SEIU 721 Research Analyst and report co-author stated: "Based on what we know, there are some concrete steps we can take to save LA millions. For example, we can start with Mellon Bank to renegotiate a 'swap' deal that was supposed to save the city money, but is instead costing LA almost $5 million a year. To fix this toxic deal, the bank wants $24 million more in fees. In 2012, NY Mellon charged the city $26 million in termination fees for another swap they had sold us that turned out to be a terrible deal for LA."

LA is not the first and probably won't be the last to be tricked into engaging in a fancy derivative deal that was way over the heads of the city employees that were talked into it by Wall Street hit men. If they had formed their own Public Bank of Los Angeles, they could not only have avoided being ripped off, but they could have actually made money and then be in a position to fix all those potholes they've been screaming about. And they could have created their own money supply the way Wall Street does it: fractional reserve banking.

Los Angeles Becomes Largest U.S. City to Take Action on Toxic Bank Deals; Unanimous Vote Requires City to Renegotiate or Terminate Multi-Million Dollar Interest Rate Rip-Off on Behalf of Taxpayers

Unanimous City Council vote sends strong message to Bank of NY Mellon, Wall Street: LA is not your ATM

The Los Angeles City Council voted 14-0 Wednesday to renegotiate or terminate without penalty a toxic swap deal the City entered into with two Wall Street banks, Bank of New York Mellon and Dexia. The measure, advanced by Fix LA, a coalition of clergy, unions and community groups aligned to restore city services and expand middle class jobs in the public sector, could save the City as much as $138 million. The International Business Times, noting the significance, reported that Los Angeles is now the largest city in the nation "to challenge ballooning Wall Street levies that accompany similar interest rate swap deals throughout the nation."

The motion further calls on the banks to return unfair profits and fees paid since 2008, estimated at more than $65 million to date. The deal costs taxpayers $4.9 million annually.

Los Angeles is now spending $290 million a year in financial fees or more than the entire city budget for maintaining its vast array of streets and highways. LA isn't the only sucker to enter into an interest rate swap in 2007 which was essentially a bet that interest rates would not fall below 2%. Then when the Federal Reserve, with its policy of QE, lowered interest rates to zero, LA and many other jurisdictions found themselves on the wrong end of a bet and were forced to shell out much more than they would have if they had kept the interest rate on the original loan.

The next sucker: Puerto Rico. Puerto Rico ran itself into debt and then tried to make up for it with interest rate swaps. Recent credit downgrades allowed Wall Street to demand hundreds of millions more in short-term lending fees, credit-default-swap termination fees, and higher interest rates. Between 2012 and 2014, Puerto Rico paid nearly $640 billion to terminate swaps in addition to $12 million annual swap payments. As a result Puerto Rico is in the same situation as Greece - borrowing money in order to make debt payments which is the same as borrowing money on one credit card to make the payments on another.

The Chicago Public School Teachers' Pension and Retirement Fund has brought suit against 10 of Wall Street's biggest banks including Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America for colluding to prevent the trading of interest rate swaps with the result that it cost the Fund more money.

If these jurisdictions - whether they be cities, counties or states - formed public banks as the state of North Dakota did, there would be no outflow of cash to Wall Street. Money would stay at the local level and could be used to support local businesses and create jobs repairing and building infrastructure.

An Infrastructure Bank Would Mean Good Jobs in a Much Needed Enterprise

If the government creates money and puts it in an infrastructure bank, that money would be spent into the economy by creating jobs to build and repair infrastructure. Thus good jobs would be created at the low and middle parts of the economic spectrum. This money would have a multiplier effect as the job holders would spend their paychecks on the necessities and luxuries of life. American GDP is based on 70% consumer spending so that would go up. Thus the democratically elected government - not private banks - would be in charge of creating the money supply and it would be to the advantage of average workers not high end financiers. Since the big banks are the current recipients of the QE largesse, that money goes into the pockets of billionaires in various ways and drives wealth and income inequality.

Or the government, instead of the private Wall Street banks, could create money itself directly and inject it into the economy in a variety of ways as Abraham Lincoln did when he had the American government create and spend greenbacks into the economy. This money, therefore, does not create debt as money created by private banks and loaned into the economy does. It's a bottom up rather than a trickle down method. Problem is that most money created today does not trickle down into the real economy.

Australian blogger Prof. Bill Mitchell agrees that PQE is economically sound. But he says it should not be called “quantitative easing.” QE is just an asset swap – cash for federal securities or mortgage-backed securities on bank balance sheets. What Corbyn is proposing is actually Overt Money Financing (OMF) – injecting money directly into the economy.

Mitchell acknowledges that OMF is a taboo concept in mainstream economics. Allegedly, this is because it would lead to hyperinflation. But the real reasons, he says, are that:

It cuts out the private sector bond traders from their dose of corporate welfare which unlike other forms of welfare like sickness and unemployment benefits etc. has made the recipients rich in the extreme. . . .

It takes away the ‘debt monkey’ that is used to clobber governments that seek to run larger fiscal deficits.

So the government could just create money and inject it into the economy in one of two ways: directly to the people in the form of a basic guaranteed income or through an infrastructure bank that creates jobs. In the first instance money would be transferred directly to people to bolster consumption. In the second case jobs would be created that would get needed work done. Or a combination of both could be used.

A third way of reducing income inequality would be to redistribute money from the 1% to the 99% through the tax code. This is the method that Bernie Sanders advocates. Taxes on wealth and financial transactions would provide additional monies which could be transferred to the 99% through social programs such as Medicare-For-All, or it could be given directly in terms of a deposit to checking accounts as was done in the Economic Stimulus Act of 2008. Money was deducted from tax liabilities or deposited directly to American citizens.

The Concept of a Basic Guaranteed Annual Income

The concept of a Basic Income in the U.S. goes back to Thomas Paine, one of the driving forces for independence and reducing inequality during the American Revolution. More recently, it’s been supported by very non-liberal individuals like Fredrick Hayek, Milton Friedman, and Richard Nixon. This would eliminate poverty in one fell swoop. All the anti-poverty programs could be rolled into one with much fewer administrative costs. Just as Medicare-For-All would simplify and reduce medical costs, a basic guaranteed income would amount to Social-Security-For-All. The state of Alaska already has such a program called the Alaska Permanent Fund which hands out money to each resident on an annual basis. In 2015 each man, woman and child received $2,072.00. For a family of four that was a nice basic income of approximately $8000. Sweet!

In the Netherlands a number of cities are experimenting with a basic income after the city of Utrecht announced that it would give no-strings-attached money to some of its residents. Tilburg, a city of 200,000 inhabitants close to the border with Belgium, will follow Utrecht’s initiative, and the cities of Groningen, Maastricht, Gouda, Enschede, Nijmegen and Wageningen are also considering it. A recent study conducted in 18 European countries concluded that generous welfare benefits make people likely to want to work more, not less.

In Switzerland, the necessary 100,000 signatures have been obtained for holding a referendum on whether Swiss citizens should receive an unconditional basic income of €2,500 per month, independently of whether they are employed or not. Other countries such as Finland and Catalonia are also moving in the direction of a no-strings-attached guaranteed income. This would do more to reduce inequality and poverty than perhaps any other measure.

If Tilburg’s basic income project gets the green light from Netherland’s state secretary of social affairs, the town will provide an extra paycheck to a pilot group of 250 people starting in January 2016, Tillburg officials said. The city has not confirmed the amount of the stipend, but in Utrecht checks will range from around €900 ($1,000) for one adult to €1,300 ($1,450).

Although the classic basic income theory proposes universal payments across the population, the two Dutch experiments will only focus on residents who are already recipients of social assistance. Those in the program will be exempt from the severe job-seeking requirements and penalties in Dutch law.

Authorities aim to test how citizens react without that sword of Damocles over their heads. Will the money encourage them to find a job or will they sit on their couches comfortably?

A guaranteed income could be means tested. Why not? Rich people don't need an extra $1000. a month. It would reduce poverty, increase consumption and bolster GDP. Rich corporations would probably increase the price of staples as people had more money to buy them causing inflation. That's why the behemoth world wide franchise operations need to be broken up so they don't collude to raise prices on staples thus defeating the purpose of the basic income. With fiat money entering the real economy instead of the billionaire economy, inflation could become a concern.

Hyperinflation is always a concern when fiat money is created. When that money is spent by consumers, it will still wind up in the hands of a few major corporations, and that would be a problem. They could just keep raising prices. That's why breaking up those large behemoths by using the Sherman Anti-Trust Act is important. Money can also be pulled back by the government by taxation if inflation threatens to get out of hand.

As Ellen Brown says: "Thus there are many ways to recycle an issue of new money back to the government. The same money could be spent and collected back year after year, without creating price inflation or hyperinflating the money supply."

However, when fiat money ends up in the pockets of billionaires as has been the case with QE, inflation is not a concern because it doesn't enter the real economy and prices don't rise. Income inequality though becomes a major concern as does the influence of big money on the political system. Billionaire money has bought and paid for the political system through lobbying and campaign donations with the result that the US is effectively no longer a democracy but a plutocracy.

What’s really scary is the general acceptance of a status quo in which most people are getting poorer and poorer, even while recent studies demonstrate that so-called “trickle-down” economics actually means an upwards flow of income until it stagnates as hoarded wealth. This stymies wealth creation in the economy, as the Institute for Policy Studies concluded after using standard economic multiplier models to show that every extra dollar paid to low-wage workers adds about $1.21 to the US economy. If this dollar went to a high-wage worker it would add only 39 cents to GDP. In other words, if the $26.7 billion paid in bonuses to Wall Street punters in 2013 had gone to poor workers, GDP would have risen by some $32.3 billion. ...

One of the main advantages of a universal basic income is that it would free people from the tyranny of the job market in which they are mere commodities by guaranteeing the most basic human right of all, that of material existence.

With inequality increasing some way or ways must be found to redress the balance. The alternative is to wake up and find ourselves in a neo-feudal society controlled by a few behemoth corporations employing only a few high level people at good wages. The rest of the population would be employed in low level service type jobs and live in relative poverty. What money they had would be spent in the troughs of the giant corporations and end up in the pockets of the 1%. Even if the 99% were given money to spend, it would still end up there - in the pockets of a few. An infrastructure bank funded by government created fiat money would provide people with decent jobs in which workers could maintain a sense of dignity and improve the quality of the nation's infrastructure at the same time.

In addition recipients of a basic income should have to give something back in terms of creating a better life for poor people around the world. Instead of armies with guns and weapons which have cost trillions and produced mainly negative results, a Peace Army could help poor people around the globe attain at least a minimally acceptable lifestyle in terms of clean water and sanitation, adequate nutrition, energy and education.

Installing solar around the world will not only provide energy for people who don't have anything but the most primitive kind while cleaning up the environment at the same time. The commitment of rich nations to help poorer nations convert to renewable energy could be manifested by funding unemployed and underemployed Americans to help build such infrastructure around the world.

It's not good for people to be idle. If they have no other job, they should at least be required to perform community service. If they have another job so that the basic income is just a supplement, this would be the ideal situation.

Income inequality will only increase as long as Wall Street banks control the money creation process, and the rest of US citizens keep going into debt whether it be with mortgages, student loans, car loans or credit cards. Local jurisdictions should take back the money creation process from Wall Street by creating their own public banks. Then the people will have the say in who gets the QE.

September 01, 2015

Bernie Sanders has been drawing huge crowds to his rallies. The American media cannot ignore that. But they will never use the S word to describe Bernie even though that is how he describes himself. Bernie represents those who would tax Wall Street to preserve social security and a host of other common sense proposals. He dares to suggest that college should be free rather than the first stage of a life of indentured servitude and indebtedness.

People are listening - especially young people. Bernie has been saying these things for years but the media for the most part has been ignoring him. Now he has a bigger megaphone. His decision to run for President in order to get his message out there is paying off.

As Bernie himself has said: “the ideas and the points that we are making are reverberating very strongly with the American people.” Whoever would have thought that Bernie Sanders, Socialist, would be reverberating with the American people, the American people who love freedom and think that society should be set up in such a way that everybody has a chance, no matter how small, of getting rich?

On the other hand Bernie points out that social security is not in danger of running out of money. All you have to do is lift the cap and let rich people pay the same percentage of their income into it as do poor people. That is pretty reverberating if you can just get the message out. Bernie is getting the message out.

The media wants to call Bernie a "populist." Well, in this instance populism equals socialism. The notion that rich people should pay a higher percentage of their income in taxes as they did during the Eisenhauer administration, that there should be a tax on financial transactions and that taxes on the rich should support programs that aid the poor, is that populism or socialism, or both?

But then Americans have always been hypocritical about socialism. Even when they are enjoying the benefits from it, they don't want to acknowledge it. In an article in the New York Times, Socialism, American Style, Gar Alperovitz and Thomas M Hanna point out that socialism is a way of life in many American states including those that are considered "conservative." Only you can't call it that. That would not be politically correct.

Conservative Alaska is a Hotbed of Socialism

Take Alaska, for example. In this ultra conservative state there is a little socialist program known as The Alaska Permanent Fund. The Alaska Permanent Fund, established by a Republican governor in 1976, combines not one, but two socialist principles: public ownership and the provision of a basic income for all residents. The fund collects and invests proceeds from the extraction of oil and minerals in the state. Dividends are paid out annually to every man, woman and child in the state. Even Sarah Palin's family collects them.

Alaska is a land of rugged individualists - Republicans all the way. However, a little known fact is that Alaska taxes the oil and gas corporations operating there and distributes the proceeds on an annual basis equally among every man, woman and child living in the state. The biggest farce of all is that Tea Party touter, Governor Sarah Palin, slapped an excess profits tax on the state's oil companies in 2008, the year she ran for vice-President alongside John McCain, so that every person in Alaska received a dividend of $3269 that year. That was a pretty good haul for a family of four: $13,076. For Palin's family - husband Todd, sons Track and Trig and daughters Bristol, Willow and Piper - it came to an even better haul - $22,883!

We have also written about the Alaska Permanent Fund here. With global warming heating up the climate, more people will be moving to Alaska, not only in search of a moderate climate, but also to take advantage of the yearly stipend which might grow to the point that citizens of Alaska wouldn't have to work at all especially in view of the minerals that are becoming available due to the melting of the Arctic ice cap. Of course, that oil should stay in the ground if the earth has a chance of not warming up by 2 degrees C and causing widespread calamity.

Political correctness and hypocrisy demands that neither Palin nor any Republican politician mention the Alaska Permanent Fund nor any other socialist program from which money is taken from corporations and redistributed to the people. After all other states might get the idea that, if Alaska can do it, their state might be able to do the same thing. Well, in ultra conservative Texas, they've already figured that out: give lip service to conservative, rugged individualist principles while employing de facto socialist ones.

Texans Don't Mind Benefiting from a Socialist Policy

As Alperovitz and Hanna state:

Texas is another example of conservative socialism in practice. Almost 150 years ago the Texas Permanent School Fund took control of roughly half of all the land and associated mineral rights still in the public domain. In 1953, coastal “submerged lands” were added after being relinquished by the federal government. Each year distributions from the fund go to support education; in 2014 alone it gave $838.7 million to state schools. Another fund, the $17.5 billion Permanent University Fund, owns more than two million acres of land, the proceeds of which help underwrite the state’s public university system.

You'd think that Bernie Sanders would have plenty of supporters in Texas, namely all those who benefit from the Texas Permanent School Fund and Permanent University Fund, but instead they're all supporters of ultra conservative Governor Rick Perry, at least the majority consisting of white Texans are. Again lip service to conservatism while the actual reality they benefit from is socialism.

It's the same with Obamacare. All those southern conservatives who are benefiting from it love the reality while at the same time calling for its repeal. As a Washington Post article stated: "When the political history of the Affordable Care Act is written, Kentucky will occupy a special place in the tale. The implementation of the ACA there has helped produce the second steepest drop in the uninsured rate of any state. Yet even though that’s occurring in one of the most unhealthy regions in the country, the general idea of 'Obamacare' remains deeply unpopular."

Many countries employ the same principles, but without the hypocrisy. These funds are called sovereign wealth funds. Norway imposes a 50% tax on oil extraction which is put into its sovereign wealth fund which provides pensions and benefits for the Norwegian people. There's no talk there of "ending social security" because they don't have the money. Norwegians have plenty of money since they have profited from their co-owned public wealth in the form of oil extraction.

Only in America is there talk about the nonviability of social security. Most people don't even realize that if the rich paid into social security at the same rate as the poor, social security would be overfunded not underfunded and senior citizens could get a nice raise especially the needy ones.

The sovereign wealth fund in which Norway saves its oil-gas income is invested internationally primarily in stocks, bonds, and, starting recently, real estate. The strict primary goal is to save for future generations, when hydrocarbons run out. Investing abroad also helps to avoid overheating the Norwegian economy. In 2009, the fund advanced 34% to recover most of the bubble losses.The fund now owns more than 1% of the world’s shares in over 8000 companies. It is Europe’s biggest equity investor. Strategically, the fund takes a 30 year investment horizon. Thus, not surprisingly,the fund is currently investing aggressively in green industries. Helped by the past 30 year petroleum revenues that have been well-invested, Norway has become the 2nd richest nation per capita.

What if California Had Invested in a Sovereign Wealth Fund?

What if California would have taken control of its oil and gas revenues and invested in a sovereign wealth fund? There would be no budget problems today and there would be plenty of money to invest in infrastructure like desalination plants. California would have had the money to deal with its water shortage problems. Instead it became a debt based economy owing what amounts to a mortgage to Wall Street.

Another example: The Permanent Wyoming Mineral Trust Fund, with a market value of more than $7 billion accumulated from mineral extraction, has helped to eliminate income taxes in the state. The basic principle is that the mineral resources of the state belong to the citizens of that state not some private corporation. The idea is that the state should endeavor to enter into a relationship that adequately compensates the citizens for the extraction of their property.

One of the largest “socialist” enterprises in the nation is the Tennessee Valley Authority, a publicly owned company with $11 billion in sales revenue, nine million customers and 11,260 employees that produces electricity and helps manage the Tennessee River system. It seems that some socialist enterprises are not only very successful but are also very popular with the citizens who collectively profit from such enterprises.

Another example is publicly owned utilities. There are, in fact, already more than 2,000 publicly owned electric utilities that, along with cooperatives, supply more than 25 percent of the country’s electricity, now operating throughout the United States. In one of the most conservative states, Nebraska, every single resident and business receives electricity from publicly owned utilities, cooperatives or public power districts. Partly as a result, Nebraskans pay one of the lowest rates for electricity in the nation.

Perhaps the best example of public ownership or socialism, if you will, is the Public Bank of North Dakota (BND). Instead of shipping money to Wall Street, North Dakota uses the profits from its state owned bank to reduce taxes, invest in infrastructure and provide reasonable student loans. Many cities, counties and states are waking up to the fact that the profits that have heretofore been reaped by Wall Street from operations in their states should instead be reinvested in the state or public entity itself. The BND is serving as an example for them to follow. Private profit that goes into out of state investors' pockets is replaced by public profit which benefits citizens locally whether in a state or a city or other public entity.

The American People Should Derive Part of their Income From Public Wealth

As I said in the aforementioned article: Rich people live off of dividends, rent or interest paid to them in one form or other from their accumulated wealth. Public wealth is owned by the citizens of the US collectively. To receive a dividend from their co-owned wealth would tend to ameliorate the growing inequality of wealth ownership in the US and supplement poor and middle class incomes. Every citizen should be in a position of deriving at least a part of their income from co-owned wealth, especially since income from jobs is going downhill due to automation and outsourcing. This would eliminate poverty, provide a basic income guarantee, stimulate the economic system from the bottom up and restore the middle class.

The US is a debt based country which by virtue of the dollar's place as the world's reserve currency can continue to go into debt. Most other countries don't have this luxury so they start sovereign wealth funds which invest in American debt among other things so that their citizens are in the position of being investors while American citizens are essentially debtors for whom the chickens have not yet come home to roost.

Bernie Sanders' message is starting to make good sense to thousands of American people who are fed up with the BS Republicans have been feeding them. They are listening to Bernie, Elizabeth Warren, the Pope and the Dalai Lama and beginning to take seriously the facts of climate change, free public education up to the university level, Medicare for all and a beefed up social security program. Ownership of wealth and assets should not be only for the rich. Socialism provides that public wealth shall be redistributed to the poor and middle class as well.

August 14, 2015

At their meeting on June 19-22, the US Conference of Mayors considered the possibility of establishing public banks as an alternative to Wall Street. Instead of spending a fortune in Wall Street fees and interest, a public bank would keep the money right in each Mayor's jurisdiction. Finally, Mayors are wising up. The Mayors Resolution on Strengthening Municipal Finances addresses the millions of dollars in fees that Wall Street banks charge cities and challenges mayors to negotiate with bankers to reduce these fees or to consider the possibility of a public bank.

Public banking is distinguished from private banking in that its mandate begins with the public's interest. Privately-owned banks, by contrast, have shareholders who generally seek short-term profits as their highest priority. Public banks are able to reduce taxes within their jurisdictions, because their profits are returned to the general fund of the public entity. The costs of public projects undertaken by governmental bodies are also greatly reduced, because public banks do not need to charge interest to themselves. Eliminating interest has been shown to reduce the cost of such projects, on average, by 50%.

The Bank of North Dakota is the only public, state owned bank in the US. Their successful model has paved the way for other public entities seeking to follow in their footsteps. Instead of sending money to Wall Street, they keep the money in state where they use it to reduce taxes, give student loans on favorable terms and fund state infrastructure projects without paying the exorbitant interest rates that Wall Street charges for access to financing.

How do cities amass such high banking service fees? A major way that cities accrue debt (and related fees and interest) is through bond issues. Cities and counties issue bonds for everything from fixing roads to building new animal shelters. However, bond issues are not a panacea for all local funding needs. Bond issues allow us to have the services, facilities, and infrastructure improvements we need but can’t fit into the budget, but they carry a hefty long-term price tag. Interest and fees are paid to Wall Street whereas with a public bank they would be paid into the local entity's general fund to defray taxes.

Paying fees to Wall Street has caused many US cities to go bankrupt. When they do, pension funds are raided to pay creditors. That means that retired firemen, policemen, teachers and others may not get their pensions. The city of Detroit went bankrupt after it engaged in a series of interest rate swaps with Wall Street. This amounted to a bet that interest rates would go up, and, when they didn't, Detroit came out on the short end of the bet. The same thing happened to Jefferson County, Alabama, San Bernardino, Stockton, and Orange County, CA. Interest rate swaps played a major part in all these bankruptcies. Wall Street made money. American cities went bankrupt.

The state of New Jersey under Governor Chris Christie's tutelage has practically bankrupted the state's pension fund by paying excessive fees to Wall Street. Of course, this is by design because the conservative agenda calls for bankrupting public pension funds and proving that government doesn't work. If they can enrich their buddies on Wall Street, so much the better. The NJ pension system paid more than $600 million in fees to Wall Street firms in 2014, 50% more than the previous year! This is a higher rate than any other state pays for pension management.

It is significantly and massively higher than was paid for management before Chris Christie came into office. In 2009 before Christie took office, NJ spent $125 million in pension management fees, a lot of money to be sure, but nothing like the $600 million in 2014. Since Chris Christie took office, his administration has spent over $1.5 billion of pensioners' money on Wall Street fees. No wonder Wall Street Republicans have contributed so much money to Christie's campaign funds!

For this amount of money spent on management you'd think that the performance of NJ's pension fund would be phenomenal, but that, unfortunately, is not the case. In fact it has lagged behind other similar pension funds and also the S&P 500. In other words NJ could have put their pension fund on autopilot, paid zero management fees and the fund would have performed better! To make up for shortfalls in the pension fund, Christie has called for reductions in payouts to NJ retirees and also a reduction in their health benefits. He did NOT call for any diminution of payouts to Wall Street in management fees or perhaps a change in management so that fees would be more in line with other states. No wonder Wall Street loves this guy!

So good old boy and everyman surrogate Chris Christie tells NJ cops, firefighters, teachers and other public employees that "there is no alternative" to reducing their benefits because the pension fund is strapped for cash! Fuggedaboudit. The only alternative is to vote Chris Christie and his politically corrupt practices out of office and initiate a public bank in the state of NJ. A public bank would keep the money in the state's pension fund instead of shipping it to Wall Street.

And it's not just simple interest that cities and states pay to Wall Street. Interest rate swaps are fancy derivatives sold by Goldman Sachs and other large Wall Street banks that have resulted in huge amounts of money being owed to Wall Street. A deal involving interest-rate swaps that Goldman struck with Oakland, California, more than a decade ago has ended up costing the city about $4 million a year, but Goldman has refused to allow Oakland out of the contract unless it ponies up a $16 million termination fee—prompting the city council to pass a resolution to boycott Goldman. When confronted at a shareholder meeting about it, Goldman CEO Blankfein explained that it was against shareholder interests to tear up a valid contract.

Local banks are not fading away in every state. They are numerous in North Dakota, where they hold over 70 percent of deposits. The state's rural geography and robust economy partly explain the difference, but the main reason is the 96-year-old Bank of North Dakota (BND), the only state-owned bank in the nation.

BND bolsters the capacity and competitive position of local banks by partnering with them on loans and providing wholesale banking services. The impact is significant. North Dakota not only has more banks per person than any other state, but the volume of business and farm lending they do is markedly higher (see this analysis), as is the share of mortgages held in state (which ensures that mortgage interest paid by residents benefits the state's economy, not Wall Street).

Public Bank of North Dakota Is Model for Cities and States

A few states and cities - including Colorado, Santa Fe, and Seattle - are now studying BND as a possible model for their own public banks, while Vermont and Oregon have taken initial steps in that direction. Oklahoma legislators are also studying the possibility of creating a state owned public bank. Eventually cities and states will wise up and stop shipping money to Wall Street.

Arizona is also looking into the public bank scenario. Arizonans for a New Economy (AzfNE) met with the board of directors of the Arizona Bankers Association (ABA) on April 15th in Tucson at the invitation of the ABA. Pamela Powers Hannley, co-director of AzfNE, presented slides to the board members showing banking trends in Arizona over the last 15 years. What their research showed is that the state has sent more and more money to Wall Street while small local banks and their assets have dried up.

Between 2005 and 2006 some $63B in assets left the balance sheets of banks operating in Arizona. In 2005 Arizona banks reported $80,451 M in assets. Of these $75,135 M were held in nationally chartered (“Wall St.”) banks while state chartered (“community”) banks held $5,316 M. By the end of 2006, the Wall St. banks held $11,782 M while the community banks held $6,180M. The Wall St. banks asset loss was 84% while the community banks had a 16% gain of assets.

Ellen Brown got the ball rolling for public banks with her book The Public Bank Solution. The big Wall Street banks seek to profit from their relationships with cities and states while a locally owned public bank would return all profits to the local economy by depositing them in the general fund.

While infrastructure projects at the national level are not currently being considered, they take place every day at the local level. In order to finance these projects huge amounts of interest are paid to Wall Street banks. In the case of California, its long awaited new Bay Bridge span was recently completed at a cost of $6.4 billion - over 400% over its initial projection. What most Californians don't realize is that the total cost of the bridge will eclipse $13 billion when interest payments are considered over their life. 50% savings is not an aberration - it is pretty much a standard calculation for what municipalities can save by issuing their own loans for critical infrastructure from their own bank.

Robert Reich details how Santa Cruz County has refused to do business with the big megabanks because it considers them a bunch of crooks. Santa Cruz County's board of supervisors just voted not to do business for five years with any of the five bank felons including JP Morgan Chase and Citicorp. The county won't use the banks' investment services or buy their commercial paper and will pull its money out of the banks to the extent that it can.

"We have a sacred obligation to protect the public's tax dollars, and these banks can't be trusted," said County Supervisor Ryan Coonerty "Santa Cruz County should not be involved with those who rigged the world's biggest financial markets." Supervisor Coonerty says he'll be contacting other local jurisdictions across the country, urging them to do what Santa Cruz County is doing.

San Diego School Districts Drink Wall Street Kool Aid

I wrote previously about how San Diego school districts are being hoodwinked by Capital Appreciation Bonds:

One fantastic advantage of these loans was the “buy now, pay later” aspect. School districts could get their money now and not have to raise taxes on current residents. Easy money. There would not have to be any payments made for 20 years. Current residents would be off the hook. But their children and grandchildren would enter an era of crushing debt when the bill became due.

And Wall Street is patient, very patient.

The ticking time bomb could cause crushing property tax increases for later generations or even bankruptcies by municipal governments. For example, San Diego County’s Poway Unified will have to pay $982 million for a $105 million CAB it issued. Poway has a payback ratio of $9.35 paid for every $1 borrowed. The final payout will be almost $1 billion.

This is payday lending for school districts. They end up with shiny new auditoriums and gymnasiums but then the same old cramped classes and underpaid teachers since CABs only apply to capital improvements, not current expenses.

The San Ysidro school district also swallowed the Kool-Aid. They got a CAB to build the Vista Del Mar elementary school virtually fro free. Only problem is that starting in 2041 the district will pay, on average, almost the full cost of Vista Del Mar each year for a decade. By 2050, the San Ysidro School District will have paid out $228.9 million, almost $15 for every $1 the district borrowed. From 2041 to 2050, the district will pay, on average, $22.9 million each year.

Republican administrations will almost always favor Wall Street banks because they give generously to their campaign funds. But Democrats are not far behind. Goldman Sachs, JP Morgan Chase and Citigroup were among the largest contributor's to President Obama's campaign in 2008, but not, however, in 2012. They voted with their dollars overwhelmingly for Mitt Romney in 2012. Goldman Sachs, Bank of America, Morgan Stanley, JP Morgan Chase, Wells Fargo and Credit Suisse were numbers 1 through 6 in terms of top campaign contributors to Romney while giving nada to Obama. I guess they hedged their bets in 2008 and bet on the wrong horse in 2012. The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into federal law by PresidentBarack Obama on July 21, 2010. Wall Street was not amused. However, they rebounded with their lobbyists and lobbied the bill to death.

April 27, 2015

On Thursday April 16, there was a panel discussion at San Diego State with the title: Crisis in American Democracy: Answers Beyond the Two Party System. There were three people on the panel representing three political parties. The Socialist Equality Party was represented by Mr. John Burton. Dr. Matt Zwolinski spoke for the Libertarians, and the Green Party was represented by Dr. Ellen Brown.

The promo said: "The content of the event will be a debate about their solutions to the problems facing American Democracy today." The event allowed 15 minutes per person for initial discussion. After the initial discussion, the event was open for public comment and questions. Then there was time for closing statements and rebuttals from each speaker.

After the initial introductions, Dr. Matt Zwolinski spoke first. A political philosopher by trade, he pointed out that he was not a member of the Libertarian party. His stated goal was a search for truth. Libertarianism is a model, in my opinion, far removed from the real world. Some of its goals are noble such as anti-war. Some of them are shared by most other enlightened parties and some are unrealistic. Libertarianism is a philosophy about what the state should and should not do. It shouldn't manage the economy. Government should play the minimal role of keeping peace. It should not control what people drink, smoke or who they have sex with. This most parties would agree with in principal at least. We should be free to live our lives however we see fit as long as we honor the rights of other people to do the same. Libertarians are champions of the free market as if one really exists or ever really existed in the world.

Well, who isn't against war? The problem is this is a doctrinaire position. Some wars are necessary, for instance, the Second World War. Should Hitler have been allowed to take over Europe and kill all the Jews? Decidedly not. However, other wars are unnecessary, for instance, George W Bush's wars in Iraq and Afghanistan which destabilized the whole Middle East and led to immense misery for many in Iraq, Syria and elsewhere. Ultimately Bush's wars have their legacy in the rise of ISIS today which is inflicting even more misery.

Zwolinski said "Free markets are something to be aspired to, not as conservatives maintain a lost treasure of our utopian past". He even maintained that class struggle was necessary to create and maintain free markets. That was quite a stretch as far as I'm concerned. It's one thing to aspire to a world in which nobody is ill housed, ill clothed or ill fed. Quite another to make the free market your dominant goal.

Libertarianism is basically a model of a perfect world, one in which, even if it could be attained, says nothing about providing for those who cannot provide for themselves. It's a cold model devoid of sympathy or empathy for anyone incapable of playing the free market competitive game, one in which the inevitable winners will hold economic sway over those who are ill equipped to play in the big leagues. He closed with the rallying cry: "Workers of the World Unite. You have nothing to lose but your chains."

Next up was Ellen Brown, champion of the public banking movement although in the role primarily of speaking for the Green Party on whose platform she ran for State Treasurer in the last election. She noted that our winner take all political system makes it virtually impossible for third parties to win especially in light of the fact that it takes big money to participate in the political process today. In Europe, where they have proportional representation, it is possible for third and fourth parties to gain seats in national legislatures. The American Constitution, methinks, needs an upgrade particularly in view of the political gridlock which it manifests today.

Ellen maintained: "The American system is not a democracy but a plutocracy." It doesn't respond to the will of the people but to the will of those with big money. In Greece and Spain third parties came out of nowhere to win in the polls and elect a third party President. But here in the US, if you can't afford TV ads, there is no way to get elected even at the state level. However, she got 6.6% of the vote and this opened some doors for her. She has had some meetings with the State Treasurer so that's an opening for her pet project of establishing public banks at the state, municipal and district level.

According to Ellen Brown, there is hope for electing third party candidates on the local level. Richmond actually elected a Green mayor, Gayle McLaughlin. Chevron, the largest corporation in Richmond, used their Big Money to fight her election all the way, but to no avail. In her time as Mayor she got a very sizable tax settlement from Chevron. She has also gone up against the Big Banks with her plan for refinancing underwater mortgages in the city. She can do the will of the people by going up against big corporate interests because the Greens don't take any money from them.

Big money is in control of government so how are you going to get the laws changed to get money out of politics? In 2008 Goldman Sachs was a major contributor to the Obama campaign. In 2012 they switched to Romney and were a major contributor to his campaign. Other major contributors to Presidential campaigns were mostly billionaires including local billionaire Irwin Jacobs who contributed to Obama.

Ellen asserted that we have delegated the power to create money to the privately owned banks. Money creation is a function assigned to Congress by the Constitution and should be a government function, not a function of Wall Street. Banks create the money supply so they have the power to control the political system. The Federal Reserve is privately owned by the Big Banks so its policies bailed out the privately owned Wall Street banks, but have not benefited the people. Wall Street got bailed out; Main Street got sold out. If we take back the power to create money, we could do things like infrastructure development and student loans at reasonable rates.

The Bank of North Dakota, the only public bank in the US, survived the Great Recession because it has the power to create its own money which it loans out to students and local enterprises at low interest. If cities did the same thing, they could use revenue deposits for the benefit of the local economy instead of for the benefit of Wall Street bankers. The current US society is debt based in the sense that economic activity is fueled by private debt: student loan debt, mortgage debt, automobile loan debt, credit card debt. Public banking means that economic development need not be fueled by debt creation.

For more on public banking which has been extensively covered by the San Diego Free Press click here.

My first impression of John Burton was that of an old line Marxist: Workers of the World Unite. You Have nothing to lose but your Chains. At first I thought this is a tired old slogan. Does it have any relevance in today's world? Then I thought: Yes it does. Most of the jobs in today's economy are service jobs - fast food workers, retail workers. McDonald's and Wal-Mart are two of the largest employers in the US and in fact in the world. All those workers are working in menial, minimum wage jobs which hardly pay the bills. Most of them are on some kind of Federal or state assistance as well.

Walmart had 2.1 million employees as of 2012, third largest in the world after the US Defense Department and China's People's Liberation Army. By 2013 Walmart was number 1 with 2.2 million employees spread all around the globe. Yum Brands, parent corporation of Kentucky Fried Chicken, Taco Bell and Pizza Hut, was number 2 in the US with McDonald's third. The Bureau of Labor Statistics predicts that those occupations with the most job growth in the next decade will be those that don't require a college education. Such jobs as personal care aids, nursing assistants, janitors, food preparation/servers and retail salespersons are high on the list.

So the mantra "Workers of the World Unite" is indeed applicable in today's world. If they formed a union over all job classifications, they could wield a considerable amount of political power.

After disparaging the charges against the Atlanta teachers caught up in a cheating scandal, Mr. Burton went on to say that the real criminals are the financial parasites who have manipulated the market creating phony mortgage bundles that crashed the market in 2008. Those criminals have never spent a day in jail and the government bailed out their wealth while the American people have not been bailed out. How could justice be so skewed? Where is this coming from? His party has a theory and concept about this: fundamental Marxism. Their position is not about reform, not about ideas. Thy think that the problems originate in the very foundations of society.

They reject the libertarian position because it's impossible to live autonomously in the modern world. You have to interact with society in order to eat. How are you going to get your housing? We exist in incredibly complex relationships. Political parties are the expression of these relationships in society. That's their starting point. These complex relationships are precisely why it would be inadvisable if not impossible, contrary to Burton's position, to bring the whole house crashing down and start all over again from scratch. It's been tried before with negative results, and in a national security state like the US, it is not likely to get very far.

What Burton's party wants to do is to understand and articulate the position of the vast majority of people, the working class, those who live from paycheck to paycheck as opposed to the capitalist class which lives on the return on investment (ROI) which comes from ownership of the means of production. They are against private ownership of the means of production.

Socialists are for government ownership of the "commanding heights" of the economy - such things as energy, telecommunications and the highest of all - banking. This is the commonality with Ellen Brown's position. Another possibility is a more democratic distribution of the ownership of wealth as opposed to the Marxist position that all wealth should be owned collectively by the society with all the participants in that society being workers. Thomas Piketty in his book Capitalism in the Twenty-First Century pointed out the unequal distribution of wealth in the world today. If private ownership of wealth were more equally distributed, there would be no need for government to own all the wealth.

Ownership of telecommunications by the government creates freedom of speech and mass propaganda problems so I don't think that would work in the US. Our political liberties, such as they are, are important. Government ownership of the distribution of electricity, however, might be a good idea since it is a part of the national infrastructure just as interstate highways are. The energy infrastructure needs to be integrated nation wide in a super grid, particularly if we are to replace fossil fuels with renewables.

There was a lively presentation of ideas from three different viewpoints followed by a lively Q&A session after the three speakers gave their initial talks. All in all a productive two hours with some interesting questions from the audience. It was an exercise in free speech which is what colleges should be all about. Thank you San Diego State.

April 23, 2015

In 2009 then Governor Arnold Schwarzenegger signed into law AB 1388 which eliminated prudent controls over how much debt school districts could enter into. Wall Street bankers then swarmed all over the state promoting Capital Appreciation Bonds (CABs), the equivalent of payday loans for school districts. One fantastic advantage of these loans was the "buy now, pay later" aspect. School districts could get their money now and not have to raise taxes on current residents. Easy money. There would not have to be any payments made for 20 years. Current residents would be off the hook. But their children and grandchildren would enter an era of crushing debt when the bill became due. And Wall Street is patient, very patient.

The ticking time bomb could cause crushing property tax increases for later generations or even bankruptcies by municipal governments. For example, San Diego County’s Poway Unified will have to pay $982 million for a $105 million CAB it issued. Poway has a payback ratio of $9.35 paid for every $1 borrowed. The final payout will be almost $1 billion. This is payday lending for school districts. They end up with shiny new auditoriums and gymnasiums but then the same old cramped classes and underpaid teachers since CABs only apply to capital improvements, not current expenses.

Then-State Treasurer Bill Lockyer called the bonds “debt for the next generation.” But some economists argue that it is a transfer of wealth, not between generations, but between classes – from the poor to the rich. Capital investments were once funded with property taxes, particularly those paid by wealthy homeowners and corporations. But California’s property tax receipts were slashed by Proposition 13 and the housing crisis, forcing school costs to be borne by middle-class households and the students themselves.

Buy now, pay later is an old marketing ploy attributable to every commercial enterprise from furniture stores to car salesmen. Nothing down, no payments till 20 whatever. Now school districts have been suckered by easy money and Wall Street salesmen eager to cash in on the public's aversion to tax increases, but, nevertheless, wanting it all -NOW.

Poway won't have to start paying on its loan for 20 years. That payment will be a little more than $30 million, $24 million of which is interest. That should let most of the principals who entered into this disastrous decision off the hook. They will be long forgotten having left a legacy of crushing debt for their children to pay off. After the first payment Poway taxpayers will have to pay for the next 19 years - until 2051 - about $50 million per year essentially paying off their initial loan every two years for the next two decades.

Unlike conventional bonds that have to be paid off on a regular basis, the bonds approved in AB1388 relaxed regulatory safeguards and allowed them to be paid back 25 to 40 years in the future. The problem is that from the time the bonds are issued until payment is due, interest accrues and compounds at exorbitant rates, requiring a balloon payment in the millions of dollars.

Wall Street exploited the school boards’ lack of business acumen and proposed the bonds as blank checks written against taxpayers’ pocketbooks. One school administrator described a Wall Street meeting to discuss the system as like “swimming with the big sharks.”

Wall Street has preyed on these school boards because of the millions of dollars in commissions. Banks, financial advisers and credit rating firms have billed California public entities almost $400 million since 2007.

Poway Unified is not the only San Diego school district that has been lured by the promise of shiny new facilities and no payments for 20 years. Vista Del Mar Elementary is the newest school in the San Ysidro School District. It got the school virtually for free using CABs. The district won’t have to make any payments on its CAB for three decades. But starting in 2041 the district will pay, on average, almost the full cost of Vista Del Mar each year for a decade. By 2050, the San Ysidro School District will have paid out $228.9 million, almost $15 for every $1 the district borrowed. From 2041 to 2050, the district will pay, on average, $22.9 million each year.

According to inewsource, Santee School District issued the most expensive capital appreciation bond in San Diego County and the fourth most expensive in California in 2011. Its payback ratio beats San Ysidro’s at $16.57 to $1. The district got $3.5 million from that bond, and by 2051 will pay back $58.6 million.

If these school districts cannot pay when their free money time is up and the bill becomes due, public school districts could be sold off to private investors. The conservatives' wet dreams of privatizing everything could become a reality. After all it was the stupidity of the democratic system of elected school board members which will have gotten them into such difficulty. Hedge fund managers wouldn't have been so stupid and out of touch with financial reality.

What could have happened is that the Federal Reserve could have made low interest loans available to municipalities and school districts, the way it did for GM and AIG during the 2008 financial crisis. But by charter the Fed can only make them available to banks. After all the Fed is owned by the large Wall Street banks and it serves their interests. By keeping money and debt creation in the hands of Wall Street, the Fed guarantees that Wall Street will continue to reap exorbitant profits while the rest of us labor under increasing debt.

There is a better way for school districts to borrow money. Take the state of North Dakota for example. One might think that North Dakota can afford to spend money on schools because of the oil boom there, but that would be wrong.

One thing that does single the state out is that North Dakota alone has its own depository bank. The state-owned Bank of North Dakota (BND) was making 1% loans to school districts even in December 2014, when global oil prices had dropped by half. That month, the BND granted a $10 million construction loan to McKenzie County Public School No. 1, at an interest rate of 1% payable over 20 years. Over the life of the loan, that works out to $.20 in simple interest or $.22 in compound interest for every $1 borrowed. Compare that to the $15 owed for every dollar borrowed by Anaheim’s Savanna School District or the $10 owed for every dollar borrowed by Santa Ana Unified.

How can the BND afford to make these very low interest loans and still turn a profit? The answer is that its costs are very low. It has no exorbitantly-paid executives; pays no bonuses, fees, or commissions; pays no dividends to private shareholders; and has low borrowing costs. It does not need to advertise for depositors (it has a captive deposit base in the state itself) or for borrowers (it is a wholesale bank that partners with local banks, which find the borrowers). The BND also has no losses from derivative trades gone wrong. It engages in old-fashioned conservative banking and does not speculate in derivatives. Unlike the vampire squids of Wall Street, it is not motivated to maximize its bottom line in a predatory way. Its mandate is simply to serve the public interest.

No exorbitantly paid executives with million dollar bonuses? But that isn't the capitalist way, you say. A bank set up to serve the people instead of the pursuit of private profit? Again, not the capitalist way. Doesn't that verge on socialism maybe even communism? Why isn't the GOP up in arms insisting that North Dakota be ostracized, maybe even booted out of the union unless they conform to capitalist principles. Oh well, we have a perfect example right here in the good old US of A of how a bank could be set up to serve the people instead of gouging the people. Instead of money sent to Wall Street, money could stay and generate interest right in the same state or municipality or even school or hospital district.

In fact there are movements afoot in many states to do just that. A Connecticut legislator is seeking a study of whether the state should create a publicly held bank as a way to provide a stable source of funding for various projects, among other potential benefits. State Rep. Susan Johnson proposed the bill, which is under deliberation by the Connecticut General Assembly's Banking Committee, co-chaired by Sen. Carlo Leone, D-Stamford. Johnson said she became interested in the concept of a public bank following the financial collapse of 2008 and 2009, when many consumers and business owners voiced frustration with banks for what they felt were restrictive credit policies.

Pennsylvania is doing the same. Across the nation, in Pennsylvania and more than two dozen state legislatures and city councils, a well organized effort is underway to create a new tool to insure sound municipal finances and economic development: the creation of public banks; to take hundreds of millions of taxpayer funds out of Wall Street banks, and put them to work locally with our community banks and credit unions for locally directed economic development and jobs creation. The Wall Street banks and their allies are not anxious for the competition for our deposits, and want to keep them to underwrite their speculation in derivatives and commodities.

Even Canada is considering going back to the debt free issuance of money for public benefit rather than private profit. A landmark Canadian federal appellate-court ruling could conceivably lead to the cancellation of Canada’s debt-based money system, and its repercussions are expected to be felt by central banks around the world. On December 12 of 2011, the Committee for Monetary and Economic Reform filed suit to legally restore the former arrangement wherein The Bank of Canada—which, unlike the United States Federal Reserve with respect to U.S. citizens, is owned by the people of Canada—would return to the monetary practices it followed from 1938 to 1974, under the Bank of Canada Act. During those years, the Canadian government borrowed money free of interest from the public Bank of Canada and made significant national progress.

In fact the movement for public banking is becoming so successful that the Big Wall Street banks are pushing back against this movement:

At the beginning of March [2015], responding to the impressive wave of state-level public banking movements in the news, Mark Calabria of the Cato Institute wrote a template that became two different published OpEds. The Denver Post titled Calabria’s piece “Colorado would be wise to reject state-owned banking,” while American Banker titled the piece “Promises of Public Banks Don't Match Reality.” The wording differs in the two pieces, but the message points are the same. In the course of delivering those points, Mr. Calabria distorts other scholars’ published research, gets some historical anecdotes wrong, and plays on tired old fears of “government control” while glossing over the rampant, widespread corruption of Wall Street banking.

Although ostensibly associated with libertarian thought, Cato really argues in the interests of its supporters, who, in addition to the Koch family, include American Express, Chase Manhattan, CME Group, and Citicorp/Citibank. Mr. Calabria does not disclose Cato’s or his own financial interest in maintaining those corporations’ business, which might well be undercut by the success of both public and community banks. These are not “libertarian” interests in the sense of being genuinely committed to local control or even qualitatively less regulation. These companies know that regulatory systems covering powerful private banks are easier to game, and the rewards are big for those who can play the system. Public banks are regulated too, but their structurally limited power and absolute transparency create substantially fewer incentives for corruption. That Mr. Calabria can’t find any anecdotes of corruption from a currently existing public bank nearing 100 years of age (the Bank of North Dakota) is more informative than his Bill and Ted-style trip through history.

Why doesn't San Diego get with the public banking movement? It could have prevented Poway, Santee and San Ysidro among others from being sucked into CABs by Wall Street. Those municipalities now face devastating property tax increases 20 years from now. Until then all is well. It always is until you actually go over the edge of a cliff. Instead of the money leaving San Diego and migrating to Wall Street where it will become grist for the derivatives mill, where hedge fund managers will bet against those school districts and others ever being able to pay it back, the money could have been deposited right here and been made to serve the public rather than private interests.

As it turns out there is a movement afoot to form a public bank in San Diego. Ian Mackenzie is a member of the nationally recognized Public Banking Institute (PBI) (www.publicbankinginstitute.org) a non-profit, nonpartisan public policy organization, engaged in campaigns of public education through the New Economy Academy to create a new economy with public banks at the state, county and city levels. Ian is presently forming a PBI San Diego Chapter and looking for people who want to join the movement. Parties interested in joining with Ian to promote public banking in San Diego can contact him at ianmackenzie24@gmail.com.

January 29, 2015

Let's steal North Dakota's banking idea. Attorney and author Ellen Brown, may have stumbled upon a UC budget solution for Napolitano and Gov. Brown in her book, "The Public Bank Solution: From Austerity to Prosperity." Their public owned bank spins off handsome profits to North Dakotans.

North Dakota has a state constitution that requires state tax money receipts to be placed in a public owned bank, which the state owns. They run the bank like a real bank, you can take out a loan for private use. North Dakotans seem to receive an annual net benefit to help subsidize its other government services.

There is a rule I think surfaces as self-evident when evaluating banking systems: not only must you follow the money, but you must task yourself to also follow the wealth.

Jump back in time to before the Rothschild banking family came to America to start our current privately owned Federal Reserve that drains our wealth ..... "Robert L. Owen, former chairman, Committee on Banking and Currency, United States Senate, explains the matter on page 98 of Senate Document No. 23. He states that when associates of the Rothschild’s asked (Ben) Franklin how he accounted for the prosperous conditions prevailing in the colonies, he replied : “That is simple — In the Colonies we issue our own money. It is called Colonial Script — We issue it in proper proportion to the demands of trade and industry.”

"Robert L. Owen remarked that not very long after the Rothschilds heard of this they realized the opportunity to exploit the situation with considerable profit to themselves. The obvious thing to do was to have a law passed prohibiting the Colonial officials from issuing their own money and make it compulsory for them to obtain the money they required through the medium of the Banks."....and therein remains our captivity to this day! The Rothchild Family controlled Federal Reserve constantly drains wealth from its nation clients. Greenland just last year exited this international banking system, withdrawing from the European Community, and formed their own bank. Greece seems to have realized the same thing as voters there just last week rejected the European Community and its 50% unemployment austerity reality.

Maybe Californians can partly escape from this centuries old Rothchild banking captivity scheme still enslaving us in endless debt while draining our wealth. Let's form our own public owned bank in California.

California collects annually about $112-billion at the state level. That ought to start the ball rolling; not all this money gets paid back out immediately.

It is not unreasonable to see that a California state owned (public owned) bank, similar to North Dakota's would likely kick back into the public trough enough profit to subsidize all of the UC System tuition hikes...maybe with a little left over for community colleges to boot. Let's try it!

If you agree perhaps notify your state legislators and Governor Brown.

September 22, 2014

The proposal to create a public bank to inject cash into Santa Fe’s economy has moved from the mayoral campaign trail to the mayor’s office.

Mayor Javier Gonzales said on the campaign trail that his administration would probe the idea of creating a public bank that would turn taxpayer money into low-interest loans for small businesses.

Now the idea is getting attention in a forum held Tuesday, Sept. 23 by the League of Women Voters of Santa Fe County. The forum, says the nonpartisan group, will be a “presentation and educational presentation and discussion of public banking, its possibilities and risks.” It’s at Christus St. Vincent Hospital’s southwest conference room, in the lower entrance near the cafeteria, from 5:30-7:30pm.

Author, playwright and lecturer Craig Barnes, the group says, and state Rep. Brian Egolf, D-Santa Fe, “will describe the history and experience of public, or community, banking, and discuss the possible role of public banks in funding public programs.” The two will answer audience questions, says the group, whose sister organization in Vermont is also conducting a study of a public banks there.

In early September, Gonzales' administration floated a bid to “further research the feasibility of establishing a publicly owned bank to help finance community projects, reduce risk to public funds in existing financial markets, and provide better financial returns on public investments.” Proposals were due Sept. 8.There’s only one public bank in the nation: the Bank of North Dakota, which says it “administers programs that promote agriculture, commerce and industry.”

September 09, 2014

In an inscrutable move that has alarmed state treasurers, the Federal Reserve, along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, just changed the liquidity requirements for the nation’s largest banks. Municipal bonds, long considered safe liquid investments, have been eliminated from the list of high-quality liquid collateral. assets (HQLA). That means banks that are the largest holders of munis are liable to start dumping them in favor of the Treasuries and corporate bonds that do satisfy the requirement.

Muni bonds fund the nation’s critical infrastructure, and they are subject to the whims of the market: as demand goes down, interest rates must be raised to attract buyers. State and local governments could find themselves in the position of cash-strapped Eurozone states, subject to crippling interest rates. The starkest example is Greece, where rates went as high as 30% when investors feared the government’s insolvency. Sky-high interest rates, in turn, are the fast track to insolvency. Greece wound up stripped of its assets, which were privatized at fire sale prices in a futile attempt to keep up with the bills.

The first major hit to US municipal bonds occurred with the downgrade of two major monoline insurers in January 2008. The fault was with the insurers, but the taxpayers footed the bill. The downgrade signaled a simultaneous downgrade of bonds from over 100,000 municipalities and institutions, totaling more than $500 billion. The Fed’s latest rule change could be the final nail in the municipal bond coffin, another misguided move by regulators that not only does not hit its mark but results in serious collateral damage to local governments – maybe serious enough to finally propel them into bankruptcy.

Why this unprecedented move by US regulators? It is not because municipal bonds are too risky, since corporate bonds with lower credit ratings are accepted under the new rules. Nor is it that the stricter standard is required by the Basel Committee on Banking Supervision (BCBS), the BIS-based global regulator agreed to by the G20 leaders in 2009. The Basel III Accords set by the BCBS are actually more lenient than the US rules and do not include these HQLA requirements. So what’s going on?

The Federal regulators adopted a new rule that requires the country’s largest banks – those with $250 billion or more in total assets – to hold an increased level of newly defined “high quality liquid assets” (HQLA) in order to meet a potential run on the bank during a credit crisis. In addition to U.S. Treasury securities and other instruments backed by the full faith and credit of the U.S. government (agency debt), the regulators have included some dubious instruments while shunning others with a higher safety profile.

Bizarrely, the Fed and its regulatory siblings included investment grade corporate bonds, the majority of which do not trade on an exchange, and more stunningly, stocks in the Russell 1000, as meeting the definition of high quality liquid assets, while excluding all municipal bonds – even general obligation municipal bonds from states with a far higher credit standing and safety profile than BBB-rated corporate bonds.

This, rightfully, has state treasurers in an uproar. The five largest Wall Street banks control the majority of deposits in the country. By disqualifying municipal bonds from the category of liquid assets, the biggest banks are likely to trim back their holdings in munis which could raise the cost or limit the ability for states, counties, cities and school districts to issue muni bonds to build schools, roads, bridges and other infrastructure needs. This is a particularly strange position for a Fed that is worried about subpar economic growth.

Not Sufficiently Liquid?

In a September 3rd press release, Federal Reserve Governor Daniel K. Tarullo stated that while “most state and municipal bonds are not sufficiently liquid to serve the purposes of HQLA in stressed periods . . . the liquidity of some state and municipal bonds is comparable to that of the very liquid corporate bonds that can qualify as HQLA.” [Cite] Criteria were being developed, he said, for considering these assets. But “it is important to get this final rule adopted now, so that the largest banks can begin to prepare for its implementation on January 1.” In the meantime, muni bonds are in limbo, and it appears that most will still not be accepted as HQLA.

The regulators consider stocks to be more liquid than muni bonds because they are readily traded on the stock market. But as the Martens’ note, stock markets can be quite inaccessible in a crisis. Quoting from the Fed’s own archives on the crash of 1987:

Market makers in the over-the-counter market were not obligated to maintain an orderly market and many withdrew from trading. Delays in processing trades resulted in investors receiving prices very different from what they expected. Many brokers did not answer their phones, leaving investors unable to reach them. Erratic price movements and quotes resulted in frequent lock-ups in the electronic trading system used in the over-the-counter market.

In any case, switching the banks’ holdings from muni bonds to corporate bonds or Treasuries is liable to have little effect in a crash. The stricter rules are supposed to be a defense against bank runs; but in a major derivatives bust and bail-in, the available collateral will go first to the derivatives claimants, through a massive concession to financial institutions in the Bankruptcy Reform Act of 2005. (See my earlier article here.) The FDIC and the depositors are both liable to be out of luck, no matter what form the collateral takes.

The Martens’ conclude:

That the Fed and its regulatory cohorts have to resort to this implausible plan – which crimps the ability of states and localities to raise essential funds to operate – in a strained effort to pretend that they’ve found a means of avoiding another massive bailout of Wall Street in a crisis, is just further proof that the only way to seriously deal with too-big-to-fail banks is to restore the Glass-Steagall Act and break up these complex creatures before they strike again.

Gordon Gekko Goes Muni?

The rule change may not have much effect in a crash, but where it will have a major effect is on the cost of credit, which will increase for municipal governments and decrease for corporate and financial institutions. The result will be to further shift power and financial resources from the public sector to the private sector.

Why would regulators dangerously jeopardize state and local government budgets in this way? Skeptical observers speculate that the intent is to Detroit-ize municipal governments, so that assets can be stripped as is being done in that imperiled city. The international bankers got away with asset-stripping Greece. Why not make the US itself a wholly-owned subsidiary of private banking interests?

If that seems far-fetched, consider what is happening with Argentina, which has been forced into bankruptcy by a US court to satisfy the exaggerated claims of certain hold-out vulture funds. IMF regulators have discussed establishing an international bankruptcy court that could strip a country such as Argentina of its assets, including prime sections of real estate, to pay off the nation’s creditors.

In the US, there is already a trend to force state and municipal governments into austerity measures, if not outright bankruptcy, in order to eliminate labor unions, pension obligations and social services. Bankruptcies can be involuntary, forced by the creditors who caused them. Detroit is the US model. Michigan’s Constitution protects pensions, so the emergency manager appointed by the governor could not unilaterally cut those funds. But in a municipal bankruptcy, a judge would decide the fate of city workers’ pensions, making it an attractive option for banking interests. The oligarchs have long had their eyes on the massive sums represented by the pension funds.

Public Banks to the Rescue?

Whatever the explanation for the Fed’s game-changing move, the vulnerability of state and local governments to unpredictable and unaccountable federal regulators is another strong argument in favor of forming publicly-owned banks. Why be under the thumb of an erratic privately-owned central bank manipulated by Wall Street megabanks now caught in multiple frauds?

Like Eurozone countries, US states cannot print their own currencies. But unlike Eurozone countries, they can borrow from their own public banks, which can create money as credit on their books just as private banks do.

At least, they could if they had their own banks. Only one state – North Dakota – has currently taken advantage of that option. North Dakota is also the only state to have escaped the 2008 credit crisis, sporting a budget surplus every year since then. It has the lowest unemployment rate in the country, the lowest default rate on credit card debt, and one of the lowest foreclosure rates.

True, North Dakota also has oil. But the 2008 crisis happened before oil and gas had made a significant impact on state revenues; and the state was posting a budget surplus all during that period. Other oil and gas states are not doing so well.

Globally, 40% of banks are publicly owned; and they are largely in the BRIC countries – Brazil, Russia, India and China. These countries also escaped the credit crisis largely unscathed.

If state and municipal governments want to protect themselves from the fate of Greece and Detroit, they would do well to follow North Dakota’s lead and form their own publicly-owned banks. And time is of the essence, if they hope to beat the rush before the first US Cyprus-style bail-in consumes the collateral that local governments are counting on to protect their multi-billions in deposits.

September 05, 2014

You can always count on Americans to do the right thing, after they’ve tried everything else. —Winston Churchill

When an article appears in Foreign Affairs, the mouthpiece of the policy-setting Council on Foreign Relations, recommending that the Federal Reserve do a money drop directly on the 99%, you know the central bank must be down to its last bullet.

The Fed, it seems, has finally run out of other ammo. It has to taper its quantitative easing program, which is eating up the Treasuries and mortgage-backed securities needed as collateral for the repo market that is the engine of the bankers’ shell game. The Fed’s Zero Interest Rate Policy (ZIRP) has also done serious collateral damage. The banks that get the money just put it in interest-bearing Federal Reserve accounts or buy foreign debt or speculate with it; and the profits go back to the 1%, who park it offshore to avoid taxes. Worse, any increase in the money supply from increased borrowing increases the overall debt burden and compounding finance costs, which are already a major constraint on economic growth.

Meanwhile, the economy continues to teeter on the edge of deflation. The Fed needs to pump up the money supply and stimulate demand in some other way. All else having failed, it is reduced to trying what money reformers have been advocating for decades — get money into the pockets of the people who actually spend it on goods and services.

A Helicopter Drop on Main Street

Blyth and Lonergan write:

[L]ow inflation . . . occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero. . . . At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.

Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality. [Emphasis added.]

A money drop directly on consumers is not a new idea for the Fed. Ben Bernanke recommended it in his notorious 2002 helicopter speech to the Japanese who were caught in a similar deflation trap. But the Japanese ignored the advice. According to Blyth and Lonergan:

Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices.

. . . The conservative economist Milton Friedman also saw the appeal of direct money transfers, which he likened to dropping cash out of a helicopter. Japan never tried using them, however, and the country’s economy has never fully recovered. Between 1993 and 2003, Japan’s annual growth rates averaged less than one percent.

Today most of the global economy is drowning in debt, and central banks have played all their other cards. Blyth and Lonergan write:

It’s well past time, then, for U.S. policymakers — as well as their counterparts in other developed countries — to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.

The Hyperinflation Bugaboo

The main reason governments have not tried this approach, say the authors, is the widespread belief that it will trigger hyperinflation. But will it? In a Forbes article titled “Money Growth Does Not Cause Inflation!”, John Harvey argues that the rule as taught in economics class is based on some invalid assumptions. The formula is:

MV = Py

When the velocity of money (V) and the quantity of goods sold (y) are constant, adding money (M) must drive up prices (P). But, says Harvey, V and y are not constant. The more money people have to spend (M), the more money that will change hands (V), and the more goods and services that will get sold (y). Only when V and y reach their limits – only when demand is saturated and productivity is at full capacity – will consumer prices be driven up. And they are nowhere near their limits yet.

The US output gap – the difference between actual output (y) and potential output – is currently estimated at about $1 trillion annually. That means the money supply could be increased by at least $1 trillion without driving up prices.

As for V, the relevant figure for the lower 80% (the target population of Blyth and Lonergan) is the velocity of M1 –– coins, dollar bills, and checkbook money. Fully 76% of Americans now live paycheck to paycheck. When they get money, they spend it. They don’t trade in the forms of investment called “near money” and “near, near money” that make up the bulk of M2 and M3.

The velocity of M1 in 2012 was 7 (down from a high of 10 in 2007). That means M1 changed hands seven times during 2012 – from housewife to grocer to farmer, etc. Since each recipient owes taxes on this money, increasing M1 by one dollar increases the tax base by seven dollars.

Total tax revenue as a percentage of GDP in 2012 was 24.3%. Extrapolating from those figures, one dollar spent seven times over on goods and services could increase tax revenue to the government by 7 x 24.3% = $1.7. The government could actually get more back in taxes than it paid out! Even with some leakage in those figures, the entire dividend paid out by the Fed might be taxed back to the government, so that the money supply would not increase at all.

Assume a $1 trillion dividend issued in the form of debit cards that could be used only for goods and services. A back-of-the-envelope estimate is that if $1 trillion were shared by all US adults making under $35,000 annually, they could each get about $600 per month. If the total dividend were $2 trillion, they could get $1,200 per month. And in either case it could, at least in theory, all come back in taxes to the government without any net increase in the money supply.

There are also other ways to get money back into the Treasury so that there is no net increase in the money supply. They include closing tax loopholes, taxing the $21 trillion or more hidden in offshore tax havens, raising tax rates on the rich to levels like those seen in the boom years after World War II, and setting up a system of public banks that would return the interest on loans to the government. If bank credit were made a public utility, nearly $1 trillion could be returned annually to the Treasury just in bank profits and savings on interest on the federal debt. Interest collected by U.S. banks in 2011 was $507 billion (down from $725 billion in 2007), and total interest paid on the federal debt was $454 billion.

Thus there are many ways to return the money issued in a national dividend to the government. The same money could be spent and collected back year after year, without creating price inflation or hyperinflating the money supply.

Why It’s the Job of the Fed

Why not just stimulate employment through the congressional funding of infrastructure projects, as politicians usually advocate? Blyth and Lonergan write:

The problem with these proposals is that infrastructure spending takes too long to revive an ailing economy. . . . Governments should . . . continue to invest in infrastructure and research, but when facing insufficient demand, they should tackle the spending problem quickly and directly.

Still, getting money into the pockets of the people sounds more like fiscal policy (the business of Congress) than monetary policy (the business of the Fed). But monetary policy means managing the money supply, and that is the point of a dividend. The antidote to deflation – a shrinking supply of money – is to add more. The Fed tried adding money to bank balance sheets through its quantitative easing program, but the result was simply to drive up the profits of the 1%. The alternative that hasn’t yet been tried is to bypass the profit-siphoning 1% and get the money directly to the consumers who create consumer demand.

There is another reason for handing the job to the Fed. Congress has been eviscerated by a political system that keeps legislators in open battle, deadlocked in inaction. The Fed, however, is “independent.” At least, it is independent of government. It marches to the drum of Wall Street, but it does not need to ask permission from voters or legislators before it acts. It is basically a dictatorship. The Fed did not ask permission before it advanced $85 billion to buy an 80% equity stake in an insurance company (AIG), or issued over $24 trillion in very-low-interest credit to bail out the banks, or issued trillions of dollars in those glorified “open market operations” called quantitative easing. As noted in an opinion piece in the Atlantic titled “How Dare the Fed Buy AIG”:

It’s probable that they don’t actually have the legal right to do anything like this. Their authority is this: who’s going to stop them? No one wants to take on responsibility for this mess themselves.

There is a third reason for handing the job to the Fed. It is actually in the interest of the banks – the Fed’s real constituency – to issue a national dividend to the laboring masses. Interest and fees cannot be squeezed from people who are bankrupt. Creditor and debtor are in a symbiotic relationship. Like parasites and cancers, compound interest grows exponentially, doubling and doubling again until the host is consumed; and we are now at the end stage of that cycle. To keep the host alive, the creditors must restock their food source. Dropping money on Main Street is thus not only the Fed’s last bullet but is a critical play for keeping the game going.

August 11, 2014

Photo from flickr user trickofthelight used under a Creative Commons license

The Bank of North Dakota is the only state-owned bank in America—what Republicans might call an idiosyncratic bastion of socialism. It also earned a record profit last year even as its private-sector corollaries lost billions. To be sure, it owes some of its unusual success to North Dakota’s well-insulated economy, which is heavy on agricultural staples and light on housing speculation. But that hasn’t stopped out-of-state politicos from beating a path to chilly Bismarck in search of advice. Could opening state-owned banks across America get us out of the financial crisis? It certainly might help, says Ellen Brown, author of the book, Web of Debt, who writes that the Bank of North Dakota, with its $4 billion under management, has avoided the credit freeze by “creating its own credit, leading the nation in establishing state economic sovereignty.” Mother Jones spoke with the Bank of North Dakota’s president, Eric Hardmeyer.

Mother Jones: How was the bank formed?

Eric Hardmeyer: It was created 90 years ago, in 1919, as a populist movement swept the northern plains. Basically it was a very angry movement by a large group of the agrarian sector that was upset by decisions that were being made in the eastern markets, the money markets maybe in Minneapolis, New York, deciding who got credit and how to market their goods. So it swept the northern plains. In North Dakota the movement was called the Nonpartisan League, and they actually took control of the legislature and created what was called an industrial program, which created both the Bank of North Dakota as a financing arm and a state-owned mill and elevator to market and buy the grain from the farmer. And we’re both in existence today doing exactly what we were created for 90 years ago. Only we’ve morphed a little bit and found other niches and ways to promote the state of North Dakota.

MJ: What makes your bank unique today?

EH: Our funding model, our deposit model is really what is unique as the engine that drives that bank. And that is we are the depository for all state tax collections and fees. And so we have a captive deposit base, we pay a competitive rate to the state treasurer. And I would bet that that would be one of the most difficult things to wrestle away from the private sector—those opportunities to bid on public funds. But that’s only one portion of it. We take those funds and then, really what separates us is that we plow those deposits back into the state of North Dakota in the form of loans. We invest back into the state in economic development type of activities. We grow our state through that mechanism.

MJ: Clearly other banks also invest their deposits. Is the difference that you are investing a larger portion of that money into the state’s own economy?

EH: Yeah, absolutely. But we have specifically designed programs to spur certain elements of the economy. Whether it’s agriculture or economic development programs that are deemed necessary in the state or energy, which now seems to be a huge play in the state. And education—we do a lot of student loan financing. So that’s our model. We have a specific mission that was given to us when we were created 90 years ago and it guides us throughout our history.

MJ: Are there areas that you invest in that other banks avoid?

EH: We made the first federally-insured student loan in the country back in 1967. So that’s been a big part of what we do. It’s become almost a mission-critical thing. I don’t know if you have been following the student loan industry lately, but it’s been very, very interesting as many have decided to leave. We will not though.

MJ: So you are able to invest in certain areas because they provide a public good.

EH: Yeah, or a direction, whether it’s energy or primary sector type of businesses. We have specific loan programs that are designed at very low interest rates to encourage activity along certain lines. Here’s another thing: We’re gearing up for a significant flood in one of the communities here in North Dakota called Fargo. We’ve experienced one of those in another community about 12 years ago which prior to Katrina was the largest single evacuation of any community in the United States. And so the Bank of North Dakota, once the flood had receded and there were business needs, we developed a disaster loan program to assist businesses. So we can move quite quickly to aid with different types of scenarios. Whether it’s encouraging different economies to grow or dealing with a disaster.

MJ: What do private banks think of you?

EH: The interesting thing about the bank is we understand that we walk a fine line between competing and partnering with the private sector. We were designed and set up to partner with them and not compete with them. So most of the lending that we do is participatory in nature. It’s originated by a local bank and we come in and participate in the loan and use some of our programs to share risk, buy down the interest rate. We even provide guarantees similar to SBA to encourage certain activity for entrepreneurial startups. Aside from that, we also act as a bankers’ bank or a wholesale bank. So we provide services to banks, whether it’s check clearing, liquidity, or bond accounting safekeeping. There’s probably 20 other bankers' banks across the country. So we act in that capacity as kind of a little mini-fed actually. And so we service 104 banks and provide liquidity to them and clear their checks and also we buy loans from them when they have a need to overline, whether it’s beyond their legal lending limit or they just want to share risk, we’ll do that. We’re a secondary market for residential loans, so we have a portfolio of $500 to $600 million of residential loans that we buy.

MJ: So what’s the advantage of a publicly owned “bankers’ bank” instead of a privately owned one?

EH: Our model is we use our deposit base to help [other banks] with funding their loans, even providing fed funds lines with our excess liquidity—we buy and sell fed funds and act as a clearinghouse for check clearing activity. That would be the benefit or different model. We’re a depository bank and can bring that to bear.

MJ: If other states had a bank like yours, do you think they would have been more insulated from the credit crisis?

EH: It all gets down the management and management philosophy. We’re a fairly conservative lot up here in the upper Midwest and we didn’t do any subprime lending and we have the ability to get into the derivatives markets and put on swaps and callers and caps and credit default swaps and just chose not to do it, really chose a Warren Buffett mentality—if we don’t understand it, we’re not going to jump into it. And so we’ve avoided all those pitfalls. That’s not to say that we’re completely immune to everything, certainly we’ve bought some mortgage-backed securities and we’re working through some of those issues, but nothing that would cause us to be concerned.

MJ: Would states with your model have any new tools to get out of the credit crisis?

EH: Let me put it to you another way and tell you another thing that we do. We also provide a dividend back to the state. Probably this year we’ll make somewhere north of $60 million, and we will turn over about half of our profits back to the state general fund. And so over the last 10, 12 years, we’ve turned back a third of a billion dollars just to the general fund to offset taxes or to aid in funding public sector types of needs.

MJ: Not bad for a state with a population of 600,000.

EH: Right. And here’s another thing: Back in 2001, 2002, when we went through the dot com bust, all the states suffered some sort of budget shortfall, including the state of North Dakota. At that time our budget shortfall was fairly insignificant--$40 some million. And so it was quite easy to overcome that. The governor just simply said alright, we’re going to turn back 1 percent of all general fund agencies, and the Bank of North Dakota, you will declare another dividend to make up the balance. And so we did that. Our capital was in a fine position to go ahead and do that. So in some cases we’ve acted as a rainy day fund.

MJ: And now the current downturn seems to have bypassed you.

EH: The State of North Dakota does not have any funding issues at all. We in fact are dealing with the largest surplus we’ve ever had. So our concern is how do we spend it wisely and make sure we save it for the future.

MJ: It’s not a bad problem to have.

EH: Yeah. We’re a little bit of an island here, and so we look around and we say boy that is unbelievable to see what is going on in the rest of the country and here we are completely countercyclical.

MJ: Are other states interested in your model?

EH: In my stint here as president, which as been about 9 years now, I’ve had a lot of inquiries from other states about how this works, could it work for them. And my predecessor, who is now the governor of the state of North Dakota, has in fact testified at a couple of other state legislatures in terms of setting up the same model. Up until a year or two ago I would have bet that it would never happen.

MJ: It’s funny, because North Dakota is traditionally a red state and yet you have these institutions—some people might say they’re socialist.

EH: Yeah, I’ve had that thrown at me many times.

MJ: But is seems like they are very popular in the state.

EH: Yeah, and of course the socialism theme has become in vogue lately, been thrown about a bit.

MJ: Aside from political opposition from bank interests, do you think it could be viable for other states to implement your model?

EH: So much of what is going on right now is a knee-jerk reaction to some things that have happened, where regulations and accounting practices weren’t where they should be. So my advice is everybody take a deep breath and we’re going to get through this and we are going to exit this as a stronger industry than when we went into it, with controls in places that are absolutely necessary, with banks understanding the risks they are taking. For all states to look at North Dakota’s model and say this would be the panacea to all those things, I don’t see that happening.

MJ: It’s clearly not the only solution, but I’m curious whether it could be part of it.

EH: Possibly. It just depends on what they want to do with it. We’re using this to spur economic growth for our state, to provide niches where others aren’t comfortable, whether it’s in-state financing of residential loans or making student loans. Every state has their own particular needs. We’ve carved out a pretty good niche here and I think are well-respected by our peers in the banking industry. They look at us as partners and not competitors. That would be the key if you were to do this in any other state is to replicate that part of our model. That’s where you really open yourself up for criticism, is state-owned businesses competing with the private sector.

MJ: Could a bank like yours be set up without sucking deposits out of private banks in the short term?

EH: I imagine you could do some sort of bond issue where you would use that as your funding source.

MJ: After seeing the credit crisis unfold, has it changed your opinion of what you do?

EH: It just reinforced what we do, and that is you stick to what you understand, you do it well, you know your customers. We’ve never been a bank that tries to hit home runs. That’s not what we’re all about. We have a specific mission which is more important. Most corporations and banks, their top priority is to maximize shareholder return. And that is a nice byproduct for us because we do have a nice return—an NROA [return on net operating assets] of 2, a ROE [return on equity] of 25, 26 percent. But really where we take the most satisfaction is making sure we meet the needs of the state and finance those types of things that make our state go forward.

August 10, 2014

Post offices turned banks—it’s currently a hot idea being debated. Is this idea a public option for credit and a safety net in the event of another financial crisis?

The U.S. post office on Martin Luther King, Jr. Blvd. is a bastion on its Harlem block. Entrenched beside a pawnshop, a cash-for-gold business, and a commercial bank many in the neighborhood are unable to use, the facility is essentially a fortress. Complete with heavy brick walls, steel screens, vaults, ATMs, and armored trucks, the premises evoke one word: Security. If you’ve followed recent news, they also suggest a second word: Bank.

“There’s a post office every five blocks in Manhattan—there’s accessibility in every zip code,” explained Frankie Wright, 32, a USPS Supervisor of Customer Services in East Harlem. “On an operational level, we’re already capable.”

The idea, popularized by journalist David Dayen and law professor Mehrsa Baradaran, would create a public option for credit and help insulate Main Street in the likely event of another financial crisis.

For example, a borrower without access to a commercial bank might typically accept a small loan at an unreasonably high interest rate from a payday lender. If a postal banking system were in place, that customer could instead walk into the local USPS branch and take out a simple loan as a government-provided public service. Due to the restricted nature of postal banking, customers’ access to funds would be comparatively safe from vultures and the whirlwinds of the broader, deeper financial system.

Although the idea seems new here and now, a successful U.S. Postal Saving System already existed from 1911-1967, and similar schemes operate overseas today, including in Germany, Japan, Switzerland, and the UK.

Though the proposal is not without its critics, there are surprisingly few legal and political hurdles to implementation. Senator Elizabeth Warren recently penned aU.S. News op-ed in earnest support, and just three weeks ago, she joined the Pew Charitable Trusts for a conference in Washington, D.C., where speakers debated common concerns: Postal banking advocates deplored the struggles of the financially insecure, while opponents expressed skepticism regarding the operational capacity of USPS to offer financial services, and questioned the effects of those new services on the federal budget.

It's expensive to be poor

In the U.S, 38 percent of the population—88 million people—either have no bank accounts (the “unbanked”) or are at least partially dependent upon high-cost services like payday lending (the “underbanked”). These households pay dearly for basics.

In 2012, the income for the average underbanked household was about $25,500, but it spent an average of nearly $2,500 solely on interest and fees for alternative financial services (AFS) like payday lending. That’s almost 10 percent of their annual income—about as much as they spent on food.

Unbanked and underbanked people are a mix of working and middle-class families, students, the unemployed, and others living paycheck-to-paycheck. Yet financial exclusion is disproportionately rampant among people of color and immigrants, and especially women within those groups. According to the last comprehensive government study, published in September 2012, more than half of African-American households were either unbanked or underbanked, with similar numbers for Hispanic and unmarried, female-led households.

There are many reasons for this maldistribution—most of them structural and based in discrimination. Regardless, the disparate impact of financial insecurity is unacceptable. Former Harlem resident and public banking advocate Alexander Hamilton did not envision such an exclusive system. Providing broad access to money and credit is why the government charters, insures, and regulates financial institutions in the first place.

The brick-and-mortar network

“People have faith in the post office,” said Wright. “USPS is a structured, silent organization. We operate discreetly. Every stamp, every dollar is accounted for. People know this.”

Wright, who started as a letter carrier at 20 and now works in management, has expertise in distribution, delivery, and labor relations—and he’s overwhelmingly supportive of postal banking and confident USPS can make the transition. “We’ve handled the invention of email and the shift from letters to parcels. We can handle this.”

USPS is the country’s most most well-liked federal agency and one of the most trusted institutions of any kind when it comes to privacy. As Wright mentioned, much of USPS management, as well as its lawyers and regulators, insist the country’s second-largest employer can and should provide basic financial services.

Indeed, the USPS Inspector General has written a white paper detailing steps for implementation. The American Postal Workers Union (AFL-CIO) is also supportive. At the Pew conference, representative Phil Tabbita argued USPS is well-suited to the task. USPS employees are already trained to handle simple financial transactions in the form of money orders and remittances. Conservatives like Rep. Darrell Issa (R-Calif.) might suggest that the workforce—a quarter of whom are military veterans—will suddenly become utterly incompetent if saddled with an expanded job description. But these cries often stem from a poorly disguised—and poorly informed—anti-labor ideology.

Deficit hysteria

There is rampant misunderstanding regarding the laws and accounting that would govern postal banking. Opponents claim that new financial services would financially tank USPS and subsequently create an unsustainable fiscal burden for the federal government.

But these concerns don’t add up. First of all, the post office is not directly funded by tax revenues. The Postal Reorganization Act of 1970 has legally forced USPS to become self-sufficient, to generate its revenue from its own services, whatever draconian cuts Congress has since imposed. Furthermore, the analysis by the Inspector General suggests USPS itself is likely to turn a profit off of new financial services through modest fees and interest.

Even so, regardless of the post office’s own financial situation, the federal government's balance sheet does not include USPS assets and liabilities. Indeed, the separation is so complete that there’s a uniquely foolish law mandating USPS set aside money today for all future retiree health benefits—without subsidy from the Treasury. This unique burden, which is not imposed upon any other government enterprise, is the chief cause of USPS’ financial woes.

Even if USPS finances were included in the broader federal budget—as they arguably should be—Deficit Hawk policies like the pre-funding requirement would make even less sense. As Deficit Owls, like former Deputy Treasury Secretary Frank Newman, assert, asking a federal agency directly funded by the U.S. government to save for a far distant future, is like forcing us to wear sweaters in July so we can store warmth for January. Uncle Sam can always create money out of thin air, subject only to inflationary constraints; setting aside dollars for 2058, instead of using them for growth now, is foolish.

Of all the services USPS could offer, small-dollar loans have come under the most scrutiny. Yet they deserve the least concern from the perspective of U.S. government fiscal sustainability. Opponents like Issa have whipped up public skepticism by conjuring an image of hard-working taxpayers “subsidizing” lending for the poor. In this scenario, postal goblins would hoard tax revenues in a vault and dish it out to poor people, who would presumably never pay it back, sending the country hurtling toward the apocalypse.

Issa’s statements at the Pew conference reveal ignorance about how bank lending works in the modern era. When you go to a bank and ask for a loan, the banker does not check the bank’s deposits or reserves before she lends you money.

As some economists have observed for decades and the Bank of England recently detailed, financial institutions do not lend pre-existing funds at all, but instead create “money” out of thin air as they lend. When you receive a loan, the bank also places your funds in an account, simultaneously expanding both the asset and liability sides of its own balance sheet. That’s how banking works.

As such, as long as postal banks are granted the same legal license as private banks—notably access to the federal discount window and interbank lending—the financial stability of postal lending would not depend on some hoarded Scrooge McDuck vault of taxpayer money.

The fire next time

When the next financial crisis hits, a postal bank might need a bailout—but it’s less horrifying than your typical private bank bailout.

During the last crisis, arguments were made that Wall Street firms had to be rescued in order to save Main Street. If preventing Main Street from falling into the flames along with Wall Street is indeed a national concern, then a stable postal banking system—a safe place for most people’s money—could be our best defense.

Although some advocate for a public-private partnership with existing commercial banks, postal banks could instead become an integral piece of a new financial architecture insulating the public and Main Street businesses from the storms of high finance.

For example, imagine the economy busts and people start to lose their jobs. The Federal Reserve could directly credit post office accounts, either with flat transfers, or preferably wages for federally funded jobs. This policy would inject money into Main Street and stabilize prices and wages.

And if you don’t like that idea, as even conservative commentator Reihan Salam at The National Review has recognized, a strong postal banking system could eliminate the need for federal deposit insurance and create more room for the private financial sector to innovate as it pleases. As a corollary, if trauma to Main Street could be avoided via the postal banking system, the case for bailing out Wall Street would lose steam.

To put it bluntly, there’s a strong case for the more affluent clients of commercial banks and the broader public to go their separate ways.

Fighting for basic security

Some progressives and populists might prefer a policy more cooperative or decentralized, but this is the immediately viable alternative to the status quo. The U.S. Conference of Mayors just endorsed the idea and Rep. Cedric Richmond (D–La.) just introduced legislation in the House of Representatives. Although Postmaster General Donahoe is against postal banking, many of his workers, managers, union leaders, regulators, and lawyers support it.

And soon the Postmaster’s endorsement won’t matter. President Obama is filling vacancies on the USPS Board of Governors: There are now 4 Democrats and 4 Republicans and the remaining seat will likely go to a Democrat—at which point the Board can override the Postmaster General.

There might be a confrontation in the courts, but under the Supreme Court ruling in Chevron v. NRDC, agencies are granted wide latitude to interpret their governing statutes. So USPS would likely survive a challenge to providing basic financial services.

Postal banking should be part of every social justice rallying cry. According to the Pew survey results, 31 percent of the unbanked said they would open an account at their local branch. Eighty-one percent of the underbanked said they would use USPS to cash checks, 79 percent percent to pay bills, and 71 percent would choose postal loans over payday loans. That’s 71 percent who could pay for food, childcare, and transportation instead of exorbitant fees on small loans.

These numbers are monumental and they reveal a widespread desire for a public option for basic financial services.

USPS has a duty of public service and can at least be held more accountable than potential servicers like WalMart, which has been moving into the AFS market. Instead of bringing megastores and megabanks to communities lacking credit, we could be asking the federal government to do its job and provide economic security and opportunity.

It’s time to push the envelope.

Raúl Carrillo wrote this article forYES! Magazine, a national, nonprofit media organization that fuses powerful ideas and practical actions. Raúl is a student at Columbia Law and a graduate of Harvard College. He is a co-organizer for The Modern Money Network (MMN), an interdisciplinary educational initiative for understanding money, finance, law, and the economy. Follow him at@ramencents.

July 20, 2014

For years, homeowners have been battling Wall Street in an attempt to recover some portion of their massive losses from the housing Ponzi scheme. But progress has been slow, as they have been outgunned and out-spent by the banking titans.

In June, however, the banks may have met their match, as some equally powerful titans strode onto the stage. Investors led by BlackRock, the world’s largest asset manager, and PIMCO, the world’s largest bond-fund manager, have sued some of the world’s largest banks for breach of fiduciary duty as trustees of their investment funds. The investors are seeking damages for losses surpassing $250 billion. That is the equivalent of one million homeowners with $250,000 in damages suing at one time.

The defendants are the so-called trust banks that oversee payments and enforce terms on more than $2 trillion in residential mortgage securities. They include units of Deutsche Bank AG, U.S. Bank, Wells Fargo, Citigroup, HSBC Holdings PLC, and Bank of New York Mellon Corp. Six nearly identical complaints charge the trust banks with breach of their duty to force lenders and sponsors of the mortgage-backed securities to repurchase defective loans.

Why the investors are only now suing is complicated, but it involves a recent court decision on the statute of limitations. Why the trust banks failed to sue the lenders evidently involves the cozy relationship between lenders and trustees. The trustees also securitized loans in pools where they were not trustees. If they had started filing suit demanding repurchases, they might wind up suedon other deals in retaliation. Better to ignore the repurchase provisions of the pooling and servicing agreements and let the investors take the losses—better, at least, until they sued.

Beyond the legal issues are the implications for the solvency of the banking system itself. Can even the largest banks withstand a $250 billion iceberg? The sum is more than 40 times the $6 billion “London Whale” that shook JPMorganChase to its foundations.

Who Will Pay – the Banks or the Depositors?

The world’s largest banks are considered “too big to fail” for a reason. The fractional reserve banking scheme is a form of shell game, which depends on “liquidity” borrowed at very low interest from other banks or the money market. When Lehman Brothers went bankrupt in 2008, triggering a run on the money market, the whole interconnected shadow banking system nearly went down with it.

Congress then came to the rescue with a taxpayer bailout, and the Federal Reserve followed with its quantitative easing fire hose. But in 2010, the Dodd Frank Act said there would be no more government bailouts. Instead, the banks were to save themselves with “bail ins,” meaning they were to recapitalize themselves by confiscating a portion of the funds of their creditors – including not only their shareholders and bondholders but the largest class of creditor of any bank, their depositors.

Theoretically, deposits under $250,000 are protected by FDIC deposit insurance. But the FDIC fund contains only about $47 billion – a mere 20% of the Black Rock/PIMCO damage claims. Before 2010, the FDIC could borrow from the Treasury if it ran short of money. But since the Dodd Frank Act eliminates government bailouts, the availability of Treasury funds for that purpose is now in doubt.

When depositors open their online accounts and see that their balances have shrunk or disappeared, a run on the banks is likely. And since banks rely on each other for liquidity, the banking system as we know it could collapse. The result could be drastic deleveraging, erasing trillions of dollars in national wealth.

Phoenix Rising

Some pundits say the global economy would then come crashing down. But in a thought-provoking March 2014 article called “American Delusionalism, or Why History Matters,” John Michael Greer disagrees. He notes that historically, governments have responded by modifying their financial systems:

Massive credit collapses that erase very large sums of notional wealth and impact the global economy are hardly a new phenomenon . . . but one thing that has never happened as a result of any of them is the sort of self-feeding, irrevocable plunge into the abyss that current fast-crash theories require.

The reason for this is that credit is merely one way by which a society manages the distribution of goods and services. . . . A credit collapse . . . doesn’t make the energy, raw materials, and labor vanish into some fiscal equivalent of a black hole; they’re all still there, in whatever quantities they were before the credit collapse, and all that’s needed is some new way to allocate them to the production of goods and services.

This, in turn, governments promptly provide. In 1933, for example, faced with the most severe credit collapse in American history, Franklin Roosevelt temporarily nationalized the entire US banking system, seized nearly all the privately held gold in the country, unilaterally changed the national debt from “payable in gold” to “payable in Federal Reserve notes” (which amounted to a technical default), and launched a series of other emergency measures. The credit collapse came to a screeching halt, famously, in less than a hundred days. Other nations facing the same crisis took equally drastic measures, with similar results. . . .

Faced with a severe crisis, governments can slap on wage and price controls, freeze currency exchanges, impose rationing, raise trade barriers, default on their debts, nationalize whole industries, issue new currencies, allocate goods and services by fiat, and impose martial law to make sure the new economic rules are followed to the letter, if necessary, at gunpoint. Again, these aren’t theoretical possibilities; every one of them has actually been used by more than one government faced by a major economic crisis in the last century and a half.

That historical review is grounds for optimism, but confiscation of assets and enforcement at gunpoint are still not the most desirable outcomes. Better would be to have an alternative system in place and ready to implement before the boom drops.

The Better Mousetrap

North Dakota has established an effective alternative model that other states might do well to emulate. In 1919, the state legislature pulled its funds out of Wall Street banks and put them into the state’s own publicly-owned bank, establishing financial sovereignty for the state. The Bank of North Dakota has not only protected the state’s financial interests but has been a moneymaker for it ever since.

On a national level, when the Wall Street credit system fails, the government can turn to the innovative model devised by our colonial forebears and start issuing its own currency and credit—a power now usurped by private banks but written into the US Constitution as belonging to Congress.

The chief problem with the paper scrip of the colonial governments was the tendency to print and spend too much. The Pennsylvania colonists corrected that systemic flaw by establishing a publicly-owned bank, which lent money to farmers and tradespeople at interest. To get the funds into circulation to cover the interest, some extra scrip was printed and spent on government services. The money supply thus expanded and contracted naturally, not at the whim of government officials but in response to seasonal demands for credit. The interest returned to public coffers, to be spent on the common weal.

The result was a system of money and credit that was sustainable without taxes, price inflation or government debt – not to mention without credit default swaps, interest rate swaps, central bank manipulation, slicing and dicing of mortgages, rehypothecation in the repo market, and the assorted other fraudulent schemes underpinning our “systemically risky” banking system today.

Relief for Homeowners?

Will the BlackRock/PIMCO suit help homeowners? Not directly. But it will get some big guns on the scene, with the ability to do all sorts of discovery, and the staff to deal with the results.

Fraud is grounds for rescission, restitution and punitive damages. The homeowners may not have been parties to the pooling and servicing agreements governing the investor trusts, but if the whole business model is proven to be fraudulent, they could still make a case for damages.

In the end, however, it may be the titans themselves who take each other down, clearing the way for a new phoenix to rise from the ashes.

The Fed doesn't actually "print" money in the sense of ink on paper hundred dollar bills. But what it can do is create money with a few keystrokes on a computer. Money so created is called "fiat money" since it's not backed by gold or anything else. The Fed currently prints the money to purchase $40 billion in mortgage backed securities and $45 billion in government bonds each month. The rationale for doing this is that it keeps interest rates low which is thought to be necessary to keep the economy humming. Before the financial crisis of 2008-09, the Fed managed to keep interest rates low by adjusting the interest rate at which banks borrow overnight. But after the financial crisis, the Fed needed a more robust policy which is called Quantitative Easing or QE. This policy is mainly a giveaway to the big Wall Street banks to augment their reserves. The lack of sufficient reserves is thought to have been the problem that caused the financial crisis.

The Fed’s massive QE program was ostensibly designed to lower mortgage interest rates, stimulating the economy. And rates have indeed been lowered – for banks. But the form of QE the Fed has engaged in – creating money on a computer screen and trading it for assets on bank balance sheets – has not delivered money where it needs to go: into the pockets of consumers, who create the demand that drives the real economy. Low interest rates will certainly stimulate the economy in the sense that they will encourage the sale of cars and houses, both of which are usually done by borrowing money at interest. So the Fed's policies are all about generating economic activity by creating more debt for average Americans and this results in bigger profits for Wall Street.

The Fed's QE policy means that the Fed buys government bonds and mortgage backed securities from private investors - mainly the big Wall Street banks - and then credits the accounts of those banks with the cash. In return the Fed takes possession of the bond or security it has just bought which is just added to the Fed's balance sheet. Now if the Fed sells that bond back into the market or redeems it from the government, it would get the cash that it had created back and could just extinguish it by a few more keystrokes on the computer. At that point the money that had previously been created will have been destroyed and would be subtracted from the Fed's balance sheet. So in that long run scenario the Fed would not have "printed" or created any money at all except on a temporaray basis. The rub is that the Fed may never remove that money from its balance sheet. It certainly hasn't done so thus far. The Fed has been buying bonds since early 2009. During that time its balance sheet has increased from $900 billion to over $4 trillion today.

A secondary effect of keeping interest rates low is that it lowers the Federal government's interest payments on its gargantuan Federal debt. That tends to neutralize the issue of government spending and deficits as a political issue. The Fed has also been buying the bonds being sold by the US government to finance its deficit. This is considered a Ponzi scheme by some writers as the Fed buys up government deficits and in effect disappears them making sure that bond redeemers always get paid. Bernie Madoff went to jail for doing the same thing except Bernie could not create money with a few keystrokes on a computer like the Fed can.

The negative side of low interest rates is that it hurts savers. Saving accounts produce hardly any interest so there is not much incentive to save. There is, therefore, an incentive to invest in the stock market which has risen dramatically and basically has become a bubble similar to the rapid increase in home values prior to the Great Recession of 2008. When that bubble burst, home values fell precipitously. The same thing could happen to the stock market if the Fed eases off its policy of QE and interest rates rise. Then the stock market could deflate like a punctured balloon.

So what is the other negative aspect of the Fed's QE policy? All that money the Fed is creating or printing, if you will, is pooling in the financial system mainly among rich investors. It is not going into the real economy or into the average person's pocket. If that money were injected into the real economy, it could be used for rebuilding, repairing and building new infrastructure, for example, which would create jobs. Instead the Fed's idea of creating jobs is to keep interest rates low so that more cars and houses will be built and sold. The jobs created will be mainly for car salesmen and real estate salespersons as well as construction crews and assembly line workers.

Money pooling in the financial system and not entering the real economy has only an indirect effect on economic growth, and has the primary purpose of making rich people, especially bankers, richer. This is thought to be a good thing in that it shores up bank reserves which were drastically depleted due to the casino operations leading up to the Great Recession when the banks collapsed not essentially because they had little in the way of reserves but primarily because they had run up their gambling debts to excessive levels with nothing to back them up.

So what will the Fed do now? It may never be able to reduce its balance sheet by either redeeming government bonds or selling them into the market because that would raise interest rates and drive up the amount the Federal government would have to pay in interest on its debt. At that point paying interest on the debt might take up the entire or almost the entire Federal budget. In addition raising interest rates would put a damper on economic activity in the form of discouraging people from purchasing cars, houses and other consumer items. Since consumption is 70% of GDP, this could lead to a recession. This would again place the big banks in jeopardy because, as economic activity diminishes, interest payments to the banks - a big part of their income - will go down, and this will add to the downward spiral which could produce Great Recession, Part 2.

Therefore, the government bonds and mortgage backed securities that the Fed is taking on its balance sheet via their money printing operations may never be redeemed or sold and may have effectively disappeared into a black hole as the Fed's balance sheet continues to increase. The Fed may be stuck printing money ad infinitum and subsidizing the banks at the expense of the average American in perpetuity. The Wall Street banks, it should be pointed out, make money every time the Fed purchases a government bond or mortgage backed security from them. Since the Fed is prohibited by law from buying government bonds from the government directly, Wall Street banks effectively act as middle men and they do so for a price, a price the Fed gladly pays, and for no risk on the part of the banks.

As the Fed continues to subsidize the big banks with money pooling at the upper end of the income spectrum, inequality increases in American society. The Fed policy of QE is a policy designed to increase inequality as the price to be paid to keep the economy rolling. The price of increased economic activity and rising GDP is the further indebtedness of the American people as they buy cars, houses and other consumer items with borrowed money. The Fed, which is not publicly owned, functions to improve the financial prospects of the Wall Street banks which are its real owners. (They actually own most of the stock in the Federal Reserve.) Is it any wonder then that the Fed's policies primarily serve the interests of its owners - the big Wall Street banks? A truly public central bank, one owned by the people of the US, could have the same function of increasing the money supply as needed, but it might do so by using the fiat money so created to more directly benefit the American people.

Germany tried “abnormal” money printing in the early 1920’s after WW 1 and the result was hyperinflation, collapse of the German economy, and the rise of Hitler. The same might happen in the US if hyperinflation were to start taking place while the Fed is stuck in handing out money to the big banks in order to keep them afloat. To fight hyperinflation the Fed would have to raise interest rates and this might bring the US economy to a grinding halt. The policy of reducing the amount of QE on a monthly basis is called "tapering." This doesn't mean that the Fed is selling off the government bonds or mortgage backed securities on its balance sheet, just buying less of them than they had previously. The Fed will still be adding billions to its balance sheet every month. Inflation is the only thing that will force the Fed to reduce its balance sheet. Otherwise, it could disappear government deficits and bank owned mortgage backed securities into its black hole indefinitely.

If the Fed starts to taper, the big boys at the Big Banks might take this as a signal to short the stock market, and this might cause the stock market bubble to burst as stock values are driven down. The average non sophisticated 401k investor would probably panic and sell on the dip losing the value of his or her retirement savings as the Wall Street guys make a killing. When the market reaches its lowest ebb, the Big Guys will start buying again driving the market back up. After the market rallies sufficiently, the average guy will work up the courage to get back in with his 401k, having lost a ton of money selling on the dip and buying on the rally, just the opposite of what sophisticated investors do. Concomitantly, the Fed will probably reintroduce its policy of QE in order to stabilize the economy, and it might have to admit that this policy will continue indefinitely or even ad infinitum. The denouement is that the rich will have gotten richer while the middle class will have been reduced to penury, just the same tendency as happened after the recession of 2008.

This debt based, Wall Street centric, unstable economy know as US capitalism could be changed by replacing the privately owned Federal Reserve with a publicly owned central bank that created and extinguished fiat money as necessary in order to more directly benefit the American people and in such a way that it serves the needs of the real economy rather than being an effort to stabilize and profit Wall Street banks. Rather than providing jobs indirectly only if more debt for the American people is created, a public central bank could inject money as needed directly into the real economy creating jobs in the process and building wealth for the average American while reducing inequality.

DALLAS, TEXAS — At its June 20-23, 2014 annual meeting, the US Conference of Mayors (USCM) adopted a pair of resolutions endorsing postal banking, co-signed by eight mayors from six states. Their goal is to bring $1 trillion of job-creating economic stimulus primarily to low-income neighborhoods, over the next decade, at zero cost to taxpayers.

Post office-based financial services will generate sales tax revenues of as much as $3 billion a year, benefiting cities of the more than 200 mayors attending the USCM meeting, according to BankACT, a nonprofit advocacy group.

In one resolution, the USCM calls upon the United States Postal Service (USPS) to offer basic financial services, such as small payday loans and reloadable money cards. Payday lenders and other financial predators target low-income working families and retirees at exorbitant cost, totaling nearly $100 billion a year, noted BankACT president Marc Armstrong. “By offering inexpensive financial services,” he said, “the USPS can help drive out financial predators, restoring billions of dollars to low-income neighborhoods at no cost to taxpayers.”

The other USCM resolution urges the Postal Service to bring back once-popular postal savings accounts and use the deposits to help fund a national infrastructure bank. This specialized bank will reduce the high cost of financing public construction projects — a boon to local governments, Armstrong added, that can generate thousands of jobs.

The USCM resolutions were inspired by a January 2014 report by the USPS Office of Inspector General (OIG) citing payday lender abuses. The OIG report proposed that the Postal Service offer low-cost basic financial services, including small payday loans and savings accounts. It will especially help people who don’t currently use bank accounts.

"BankACT invites all mayors and other elected officials to take a stand with us on this trillion-dollar issue," Armstrong said. The two postal banking resolutions and a slide briefing are available for download at postalpower.org.

About BankACT

BankACT (bankact.org) is a nonprofit organization advocating financial fairness via "public options" for banking and financial services. BankACT advocates postal banking as proposed by the Office of Inspector General of the US Postal Service. For information, visit bankact.org or write to info@bankact.org.

July 10, 2014

Mortgage debt overhang from the housing bust has meant lack of middle-class spending power and consumer demand, preventing the economy from growing. The problem might be fixed by a new approach from the Fed. But if the Fed won’t act, counties will, as seen in the latest developments on eminent domain and litigation over MERS.

Former Assistant Treasury Secretary Paul Craig Roberts wrote on June 25th that real US GDP growth for the first quarter of 2014 was a negative 2.9%, off by 5.5% from the positive 2.6% predicted by economists. If the second quarter also shows a decline, the US will officially be in recession. That means not only fiscal policy (government deficit spending) but monetary policy (unprecedented quantitative easing) will have failed. The Federal Reserve is out of bullets.

Or is it? Perhaps it is just aiming at the wrong target.

The Fed’s massive quantitative easing program was ostensibly designed to lower mortgage interest rates, stimulating the economy. And rates have indeed been lowered – for banks. But the form of QE the Fed has engaged in – creating money on a computer screen and trading it for assets on bank balance sheets – has not delivered money where it needs to go: into the pockets of consumers, who create the demand that drives productivity.

Some ways the Fed could get money into consumer pockets with QE, discussed in earlier articles, include very-low-interest loans for students and very-low-interest loans to state and local governments. Both options would stimulate demand. But the biggest brake on the economy remains the languishing housing market. The Fed has been buying up new issues of mortgage-backed securities so fast that it now owns 12% of the mortgage market; yet housing continues to sputter, largely because of the huge inventory of underwater mortgages.

According to Professor Robert Hockett, who originated a plan to tackle this problem using eminent domain, 40% of mortgages nationally are either underwater or nearly so, meaning more is owed on the home than it is worth. Seventy percent of homes that are deeply underwater wind up in default.

Worse, second mortgages are due for a reset. Over the next several years, principal payments will be added to interest-only payments on second mortgages taken out during the boom years. Many borrowers will be unable to afford the higher payments. The anticipated result is another disastrous wave of foreclosures.

The mortgage debt overhang was the result of financial deregulation and securitization, which created a massive housing bubble. When it inevitably burst, housing prices plummeted, but mortgages did not. The resources of the once-great middle class were then diverted from spending on consumer goods to trying to stay afloat in this sea of debt. Without demand, stores closed their doors and workers got laid off, in a vicious downward spiral.

The glut of underwater mortgages needs to be written down to match underlying assets, not just to help homeowners but to revive the economy. However, most of them cannot be written down, because they have been securitized (sold off to investors) in complicated trust arrangements that legally forbid renegotiation, even if all the parties could be found and brought to agreement.

Reviving the HOLC

The parties themselves cannot renegotiate, but the Fed could. The Fed is already voraciously buying up mortgage-backed securities. What it is not doing but could is to target underwater mortgages and renegotiate them after purchase, along the lines of the Home Owners’ Loan Corporation (HOLC) created during the New Deal.

The HOLC was a government-sponsored corporation created in 1933 to revive the moribund housing market by refinancing home mortgages that were in default. To fund this rescue mission without burdening the taxpayers, the HOLC issued bonds that were sold on the open market. Although 20% of the mortgages it bought eventually defaulted, the rest were repaid, allowing the HOLC not only to rescue the home mortgage market but to turn a small profit for the government.

In 2012, Senator Jeff Merkley of Oregon proposed the large-scale refinancing of underwater mortgages using an arrangement similar to the HOLC’s. Bonds would be issued on the private bond market, capitalizing on today’s very low US government cost of funds; then underwater mortgages would be bought with the proceeds.

For the bonds to be appealing to investors, however, they would need to be at 2-3% interest, the going rate for long-term federal bonds. This would leave little cushion to cover defaults and little reduction in rates for homeowners.

The Fed, on the other hand, would not have these limitations. If it were to purchase the underwater mortgages with QE, its cost of funds would be zero; and so would the risk of loss, since QE is generated with computer keys.

Finance attorney Bruce Cahan has another idea. If the Fed is not inclined to renegotiate mortgages itself, it can provide very-low-interest seed money to capitalize state-owned banks, on the model of the Bank of North Dakota. These publicly-owned banks could then buy up mortgage pools secured by in-state real estate at a discount off the face amount outstanding, and refinance the mortgages at today’s low long-term interest rates.

The Eminent Domain Alternative

The Fed has the power (particularly if given a mandate from Congress), but so far it has not shown the will. Some cities and counties are therefore taking matters into their own hands.

Attracting growing interest is Professor Bob Hockett’s eminent domain plan, called a “Local Principal Reduction program.” As described by the Home Defenders League:

The city works with private investors to acquire a set of the worst, hardest to fix underwater mortgages (especially “Private Label Securities” of PLS loans) and refinances them to restore home equity. If banks refuse to cooperate, cities may use their legal authority of eminent domain to buy the bad mortgages at fair market value and then reset them to current value.

The latest breaking news on this front involves the City of San Francisco, which will be voting on a resolution involving eminent domain on July 8th. The resolution states in part:

That it is the intention of the Board of Supervisors to explore joining with the City of Richmond in the formation of a Joint Powers Authority for the purpose of implementing Local Principal Reduction and potentially other housing preservation strategies . . . .

The MERS Trump Card

If the eminent domain plan fails, there is another way local governments might acquire troubled mortgages that need to be renegotiated. Seventy percent of all mortgages are now held in the name of a computer database called MERS (Mortgage Electronic Registration Systems). Many courts have held that MERS breaks the chain of title to real property. Other courts have gone the other way, but they were usually dealing with cases brought by homeowners who were held not to have standing to bring the claim. Counties, on the other hand, have been directly injured by MERS and do have standing to sue, since the title-obscuring database has bilked them of billions of dollars in recording fees.

In a stunning defeat for MERS, on June 30, 2014, the US District Court for the Eastern District of Pennsylvania granted a declaratory judgment in favor of County Recorder Nancy J. Becker, in which MERS was required to come up with all the transfer records related to its putative Pennsylvania properties. The judgment stated:

Defendants are declared to be obligated to create and record written documents memorializing the transfers of debt/promissory notes which are secured by real estate mortgages in the Commonwealth of Pennsylvania for all such debt transfers past, present and future in the Office for the Recording of Deeds in the County where such property is situate.

IT IS STILL FURTHER ORDERED AND DECLARED that inasmuch as such debt/mortgage note transfers are conveyances within the meaning of Pennsylvania law,the failure to so document and record is violative of the Pennsylvania Recording Statute(s).

Memorializing all transfers past, present and future, probably cannot be done at this late date – at least not legitimately. The inevitable result will be fatal breaks in the chain of title to Pennsylvania real property. Where title cannot be proved, the property escheats (reverts) to the state by law.

Only 29% of US homes are now owned free and clear, a record low. Of the remaining 71%, 70% are securitized through MERS. That means that class-action lawsuits by county recorders could potentially establish that title is defective to 50% of US homes (70% of 71%).

If banks, investors and federal officials want to avoid this sort of display of local power, they might think twice about turning down reasonable plans for solving the underwater mortgage crisis of the sort proposed by Senator Merkley, Professor Hockett and Attorney Cahan.

June 21, 2014

Public Banks are public welfare-oriented institutions and, instead of profit maximisation, their aim is the sustainable development of the real economy within their business territories.

by The Public Banking Forum of Ireland

Public Banks

Public Banks are public welfare-oriented institutions and, instead of profit maximisation, their aim is the sustainable development of the real economy within their business territories. 40% of all Banks in the world are Public Banks mainly in prosperous & emerging countries like Germany, Brazil, Russia, India & China. The BRIC countries have grown 92% in the last decade compared with 15% for the west. The West is now in decline while the BRICs continue to prosper. Less than 10% of all loans granted by our current banking system are given to businesses.

There are basically four models:

The German Savings Bank model,

theCo-op model,

the Japan Post Bank model

& the Bank of North Dakota model.

The German Savings Banks

Founded 1778, have 40% of the total German market and provide 42.7 per cent of all finance to German businesses.

The German Public Savings Banks are

1. Operated on commercial principles with the aim of maximising sustainable lending and not on maximising profits.

2. Operated on the Principle of “Local deposits into local loans” keeping capital in their own area.

3. Surpluses remain with the Bank & within the region: Profits are used to increase equity and for non-profit purposes (the public benefit principle).

4. Banned from engaging in financial speculation.

5. Only allowed to lend only to local people and businesses in its designated catchment area.

In the current recession between 2008 & 2011 German Public Banks increased lending to Small & Medium Size Enterprises (SME’s) by 17%.

Co-op Banks

Founded 1840. “Volksbank” (German for “people’s bank”).There are Volksbank networks in at least ten countries. Germany has 1,099 independent local Volksbanken with 13,211 branches making up 24% of the German banking market.

Japan Post Bank

Postal savings was introduced to Japan in 1875. Japan Post Bank (JPB), now the largest depository bank in the world. Not only is it a convenient place for Japanese citizens to save their money, but the government has succeeded in drawing on JPB’s massive deposit base to fund a major portion of the federal budget. Rather than using its deposits to back commercial loans as most banks do, Japan Post invests them in government securities. That means the government is borrowing from its own bank and its own people rather than from foreign bondholders. The Japanese government can borrow 10-year money at 1 percent and lend it to the U.S. at 1.6 percent (the going rate on U.S. 10-year bonds), making a tidy spread.

Although theoretically privatized in 2007, it has been a political football, and 100 percent of its stock is still owned by the government. To keep the system stable and sustainable, the money just needs to come from the nation’s own government and its own people, and needs to return to the government and people. (Ellen Brown)

The Bank of North Dakota

Established 1919. The BND is similar to a Public Central Bank i.e. creates its own credit. It is a depository for all state tax collections and fees. It pays a competitive rate to the state treasurer. It plows those deposits back into the state of North Dakota in the form of loans. It invests back into the state in economic development type of activities.

What make these types of Public Savings/Lending Institution so successful?

In all cases the profit & the interest on lending is returned to the institution to boost its capital & returned to the community in new loans. This amount of interest can be from a few percent on short term loans to as much as 150% in the case of mortgages. All this is returned to the institution & the community. Under our current system the Interest and profit is taken out of the community & economy. This lack of adequate currency in the economy causes a slow down or a recession.

These Public Institutions also benefit the economy by the type of loan they offer i.e. loans that support SME’s. This is the type of loan that Big Banks will not offer as they do not know their customers and tend to only lend where there is an asset involved they can repossess and sell off if there is a problem with repayment.

This type of lending over the long term does not support the economy or those who create jobs. It just fuel Boom-Bust cycles as was the case with our property bubble.

Why we need it

If we refuse to allow our government to make money through public enterprises, we will be destined to bear the burden of supporting government with our taxes, while we watch countries such as China, Korea and Japan, which do allow public industries, enjoy the fruits of that efficient people-serving arrangement. (Ellen Brown)

How we can get it?

The German Savings Banks, The Sparkassen offer their system. They can be formed as Co-ops or Foundations. We could expand the Post Office service to a Post Bank service.

The 99.2% State owned PTSB is about to be split into a Good & Bad bank and sold off. Why not retain the Good bank and convert its network of 70 odd branches to Public Banks. This alone would be a major start.

Credit Unions that are under threat of being subsumed by bigger CU’s or taken over by banks could convert to Public Banks and retain their ethos.

What are the consequences of not putting a Public Banking system in place?

A public banking system can be put in place at a minimal cost while the cost through Bail-outs or Bail-ins of getting our current banks back to their original state of “not serving the real economy” could be as much as 50bn? 100bn? Who knows? “Ireland Exits Troika Bailout To Prepare For Bail-ins” Reggie Middleton. Michael Noonan passed the Bail-in process into EU law during our EU Presidency.

Ellen Brown, author of the Public Bank Solution, is running for California State Treasurer. The primary election takes place June 3. There are three candidates. Two will advance to the general election. She is running on a platform to establish a public bank for the state of California similar to the one in North Dakota. She has the endorsement of the Green Party – along with Luis Rodriguez for governor and David Curtis for secretary of state. Green Party candidates take no corporate money. Candidates who take corporate money – and that means nearly all conventional candidates – are beholden to large corporate interests and cannot properly represent the interests of the disenfranchised 99%.

A public bank will bring many benefits to California including the fact that interest on outstanding loans will accrue to the taxpayers of the state instead of to private Wall Street banks. State and local finances could be restored by making sure that profits now going to Wall Street will remain at home. Taxes could be lowered, public services expanded. The cost of a college education could be reduced. The cost of borrowing for in state businesses could be lowered thus attracting more businesses to California.

The Bank of North Dakota (BND) earns more than 20% annual return on equity by investing within the state. The BND has earned profits of $300M over 10 years which go into the state treasury. North Dakota had the lowest foreclosure rate in the nation and has had no bank failures in over 20 years. Far from competing with community banks, a public bank of California would backstop local banks making them more creditworthy and capable of making larger loans.

A public bank could control rising credit costs. A year ago, California was rated BBB, barely higher than bankrupt Greece. That means that the state's borrowing costs go up when it has to borrow at market rates from Wall Street. A state owned public bank could keep borrowing costs down because it wouldn't have to charge market rates. This would help municipalities as well.

Today, state and local governments are investing their capital in the form of pension funds as well as depositing their tax revenues on Wall Street. They are handing over their huge credit generating power to the same big banks that got us into the Great Recession and had to be bailed out by the Federal government. They are investing in Wall Street, not Main Street. Wall Street takes the money and gambles with it in the financial casinos loaning out huge amounts to hedge funds, arbitrageurs, high frequency traders and corporate raiders. They are involved in stripmining the economy rather than building up wealth in and for the state of California and its municipalities.

Over 20 towns in the state of Vermont considered a resolution at this year’s town hall meeting on March 4 to direct their legislators to create a state bank for Vermont. The vote does not have legally binding effects; it is only advisory. But it offers an important indicator of public sentiment on legislation being considered. The bills pending before bothhouses of the Vermont state legislature would transfer 10 percent of tax dollars to a publicly held agency, VEDA, the Vermont Economic Development Authority, and would give VEDA a banking license. The proposal would completely transform the way state revenues are used to finance public services.

Wall Street invests states' money in projects that its citizens do not necessarily support like the Keystone pipeline. They do not advance loans to small local businesses because they are more interested in loaning huge amounts of money to hedge funds and private equity groups which use the money to take over profitable companies, get rid of the unionized workers and raid the pensions funds before taking them into bankruptcy.

At the same time, the state borrows the money used for economic development and infrastructure projects from Wall Street investment banks at market rates. Neither of these things would be true if California had a public bank. In 18 states besides Vermont, including California, there are proposals for public banks being considered at the state or the city level. Arizona just chartered a commission to study the issue, and Reading, PA, is in the process of establishing a city public bank.

Another reason to charter a public bank in the state of California is the massive fraud that exists and has existed on Wall Street. In March the FDIC filed a massive 24-count civil suit for damages for LIBOR manipulation against sixteen of the world’s largest banks, including the three largest US banks – JP Morgan Chase, Bank of America and Citigroup. LIBOR (the London Interbank Offering Rate) is the benchmark rate at which banks themselves can borrow. It is a crucial rate involved in over $400 trillion in derivatives called interest-rate swaps, and it is set by the sixteen private megabanks behind closed doors.

No one has yet completely categorized all the outstanding swap deals entered into by local and state governments. But in a sampling of swaps within California, involving ten cities and counties (San Francisco, Corcoran, Los Angeles, Menlo Park, Oakland, Oxnard, Pittsburgh, Richmond, Riverside, and Sacramento), one community college district, one utility district, one transportation authority, and the state itself, the collective tab was $365 million in swap payments annually, with total termination fees exceeding $1 billion.

Omitted from the sample was the University of California system, which alone is reported to have lost tens of millions of dollars on interest-rate swaps. According to an article in the Orange County Register on February 24, 2014, the swaps now cost the university system an estimated $6 million a year. University accountants estimate that the 10-campus system will lose as much as $136 million over the next 34 years if it remains locked into the deals, losses that would be reduced only if interest rates started to rise. No wonder tuition is so high. The money is needed to pay off Wall Street!

The UC’s dilemma is explored in a report titled “Swapping Our Future: How Students and Taxpayers Are Funding Risky UC Borrowing and Wall Street Profits.” The authors, a group called Public Sociologists of Berkeley, say that two factors were responsible for the precipitous decline in interest rates that drove up UC’s relative borrowing costs. One was the move by the Federal Reserve to push interest rates to record lows in order to stabilize the largest banks. The other was the illegal effort by major banks to manipulate LIBOR, which indexes interest rates on most bonds issued by UC.

Why, you might ask, doesn't the University of California do something about their escalating borrowing costs? The answer might be found in the fact that the UC Board of Regents, which controls such decisions, is populated to a great extent by people who already have ties to Wall Street. They include Chief Financial Officer Taylor, who walked through the revolving door from Lehman Brothers, where he was a top banker in Lehman’s municipal finance business in 2007. That was when the bank sold the university a swap related to debt at UCLA that has now become the source of its biggest swap losses. The university hired Taylor for his $400,000-a-year position in 2009, and he has continued to sign contracts for swaps on its behalf ever since.

Several very wealthy, politically powerful men are fixtures on the regent’s investment committee, including Richard C. Blum (Wall Streeter, war contractor, and husband of U.S. Senator Dianne Feinstein), and Paul Wachter (Gov. Arnold Schwarzenegger’s long-time business partner and financial advisor). The probability of conflicts of interest inside this committee—as it moves billions of dollars between public and private companies and investment banks—is enormous.

Blum’s firm, Blum Capital, is also an adviser to CalPERS, the California Public Employees’ Retirement System, which also got caught in the LIBOR-rigging scandal. “Once again,” said CalPERS Chief Investment Officer Joseph Dear of the LIBOR-rigging, “the financial services industry demonstrated that it cannot be trusted to make decisions in the long-term interests of investors.” If the financial services industry cannot be trusted, it needs to be replaced with something that can be trusted like a public bank.

A public bank would not be involved in the Wall Street derivatives casino games. It would make money and return interest on deposits the old fashioned way: by loaning out deposits to local businesses and paying interest on deposits to pension funds, university endowments and other depositors.

A bill to study the feasibility of a public bank of California was introduced by State Senator from Chula Vista, Ben Hueso, in 2011. Hueso was born in San Diego and grew up in Logan Heights. He served on the San Diego City Council, including two years as city council president. The bill he introduced was to establish a commission to study the feasibility of a public bank for the state of California. The following is from Yes magazine:

California is the eighth largest economy in the world, and it has a debt burden to match. The state has outstanding general obligation bonds and revenue bonds of $158 billion, largely incurred for building infrastructure. Over $7 billion of California’s annual budget goes to pay interest on the state’s debt.

As large as California’s liabilities are, they are exceeded by its assets, which are sufficient to capitalize a bank rivaling any in the world. That’s the idea behind Assembly Bill 750, introduced by Assemblyman Ben Hueso of San Diego, which would establish a blue ribbon task force to consider the viability of creating the California Investment Trust, a state-owned bank receiving deposits of state funds. Instead of relying on Wall Street banks for credit—or allowing a Wall Street bank to enjoy the benefits of lending its capital—California may decide to create its own, publicly owned bank.

What California can do with its own bank, other states can do as well, on a scale proportionate to their populations and economies.

On May 2, AB 750 moved out of the Banking and Finance Committee with only one nay vote, and is now on its way to the Appropriations Committee. Three unions—the California Nurses Association, the California Firefighters, and the California Labor Council—submitted their support for the bill. The state bank idea also got a nod from former Secretary of Labor Robert Reich in his speech at the California Democratic Convention in Sacramento the previous day.

The bill was passed by both Houses of Congress only to have Governor Jerry Brown veto it. Later in 2012 Hueso introduced another bill - this time to establish, not just to study the viability of, a public bank of California - Assembly Bill 2500. He later withdrew that bill. The reasons why are not clear.

The larger question is why our state and local governments continue to do business with a corrupt global banking cartel. There is an alternative. They could set up their own publicly-owned banks, on the model of the state-owned Bank of North Dakota. Fraud could be avoided, profits could be recaptured, and interest could become a much-needed source of public revenue. Credit could become a public utility, dispensed as needed to benefit local residents and local economies.

Check out this video presentation by Ellen on why California needs a public bank:

"Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means?" — Dr. Michael Hudson, Counterpunch, October 2010

News & Opinion by Ellen Brown

(NATIONAL) -- When the US Federal Reserve bought an 80% stake in American International Group (AIG) in September 2008, the unprecedented $85 billion outlay was justified as necessary to bail out the world’s largest insurance company. Today, however, central banks are on a global corporate buying spree not to bail out bankrupt corporations but simply as an investment, to compensate for the loss of bond income due to record-low interest rates.

Indeed, central banks have become some of the world’s largest stock investors.

This is a rather alarming development. Central banks have the power to create national currencies with accounting entries, and they are traditionally very secretive. We are not allowed to peer into their books.

It took a major lawsuit by Reuters and a congressional investigation to get the Fed to reveal the $16-plus trillion in loans it made to bail out giant banks and corporations after 2008.

What is to stop a foreign bank from simply printing its own currency and trading it on the currency market for dollars, to be invested in the US stock market or US real estate market? What is to stop central banks from printing up money competitively, in a mad rush to own the world’s largest companies?

Apparently not much. Central banks are for the most part unregulated, even by their own governments. As the Federal Reserve observes on its website:

"[The Fed] is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. "

As former Federal Reserve Chairman Alan Greenspan quipped, “Quite frankly it does not matter who is president as far as the Fed is concerned. There are no other agencies that can overrule the action we take.”

The Central Bank Buying Spree

That is how “independent” central banks operate, but it evidently not the US central bank that is gambling in the stock market. After extensive quantitative easing, the Fed has a $4.5 trillion balance sheet; but this sum is accounted for as being invested conservatively in Treasuries and agency debt (although QE may have allowed Wall Street banks to invest the proceeds in the stock market by devious means).

Which central banks, then, are investing in stocks? The biggest player turns out to be the People’s Bank of China (PBoC), the Chinese central bank.

"Evidence of equity-buying by central banks and other public sector investors has emerged from a large-scale survey compiled by Official Monetary and Financial Institutions Forum (OMFIF), a global research and advisory group. The OMFIF research publication Global Public Investor (GPI) 2014, launched on June 17 is the first comprehensive survey of $29.1 trillion worth of investments held by 400 public sector institutions in 162 countries. The report focuses on investments by 157 central banks, 156 public pension funds and 87 sovereign funds, underlines growing similarities among different categories of public entities owning assets equivalent to 40% of world output. The assets of these 400 Global Public Investors comprise $13.2 trillion (including gold) at central banks, $9.4 trillion at public pension funds and $6.5 trillion at sovereign wealth funds."

Public pension funds and sovereign wealth funds are well known to be large holders of shares on international stock markets. But it seems they now have rivals from unexpected sources:

"One is China’s State Administration of Foreign Exchange (SAFE), part of the People’s Bank of China, the biggest overall public sector investor, with $3.9 trillion under management, well ahead of the Bank of Japan and Japan’s Government Pension Investment Fund (GPIF), each with $1.3 trillion.

SAFE’s investments include significant holdings in Europe. The PBoC itself has been directly buying minority equity stakes in important European companies.

Another large public sector equity owner is Swiss National Bank, with $480 billion under management. The Swiss central bank had 15% of its foreign exchange assets – or $72 billion – in equities at the end of 2013."

Public pension funds and sovereign wealth funds invest their pension contributions and exchange reserves earned in foreign trade, which is fair enough. The justification for central banks to be playing the stock market is less obvious. Their stock purchases are justified as compensating for lost revenue caused by sharp drops in interest rates.

But those drops were driven by central banks themselves; and the broad powers delegated to central banks were supposed to be for conducting “monetary policy,” not for generating investment returns. According to the OMFIF, central banks collectively now have $13.2 trillion in assets (including gold). That is nearly 20% of the value of all of the stock markets in the world, which comes to $62 trillion.

From Monetary Policy to Asset Grabs

Central banks are allowed to create money out of nothing in order to conduct the monetary policies necessary to “regulate the value of the currency” and “maintain price stability.”

Traditionally, this has been done with “open market operations,” in which money was either created by the central bank and used to buy federal securities (thereby adding money to the money supply) or federal securities were sold in exchange for currency (shrinking the money supply).

"Quantitative easing” is open market operations on steroids, to the tune of trillions of dollars. But the purpose is allegedly the same—to augment a money supply that shrank by trillions of dollars when the shadow banking system collapsed after 2008.

The purpose is not supposed to be to earn an income for the central bank itself. Indeed, the U.S. central bank is required to return the interest earned on federal securities to the federal government, which paid the interest in the first place.

Further, as noted earlier, it is not the US Federal Reserve that has been massively investing in the stock market. It is the PBoC, which arguably is in a different position than the US Fed. It cannot print dollars or Euros. Rather, it acquires them from local merchants who have earned them legitimately in foreign trade.

However, the PBoC has done nothing to earn these dollars or Euros beyond printing yuan. It trades the yuan for the dollars earned by Chinese sellers, who need local currency to pay their workers and suppliers. The money involved in these transactions has thus doubled.

The merchants have been paid in yuan and the central bank has an equivalent sum in dollars or Euros. That means the Chinese central bank’s holdings are created out of thin air no less than the Federal Reserve’s dollars are.

Battle of the Central Banks?

Western central banks have generally worked this scheme discreetly. Not so much the Chinese, whose blatant gaming of the system points up its flaws for all to see.

Georgetown University historian Professor Carroll Quigley styled himself the librarian of the international bankers. In his 1966 book Tragedy and Hope, he wrote that their aim was “nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.” This system was to be controlled “in a feudalist fashion by the central banks of the world acting in concert by secret agreements,” central banks that “were themselves private corporations.”

It may be the Chinese, not acting in concert, who break up this cartel. The PBoC is no more transparent than the US Fed, but it is not an “independent” central bank. It is a government agency accountable to the Chinese government and acting on its behalf.

The Chinese have evidently figured out the game of the “independent” central bankers, and to be using it to their own advantage.

If the Fed can do quantitative easing, so can the Chinese – and buy up our assets with the proceeds. Owning our corporations rather than our Treasuries helps the Chinese break up US dollar hegemony.

Whatever power plays are going on behind the scenes, it is increasingly clear that they are not serving we-the-people.

The global central banking scheme is systemically flawed and needs to be radically overhauled.

May 24, 2014

The movement to break away from Wall Street and form publicly-owned banks continues to gain momentum. But enthusiasts are deterred by claims that a state-owned bank would violate constitutional prohibitions against “lending the credit of the state.”

California’s constitution is typical. It states in Section 17: “The State shall not in any manner loan its credit, nor shall it subscribe to, or be interested in the stock of any company, association, or corporation . . . .”

The language sounds prohibitive, but what does it mean? Hundreds of state and local government entities extend the credit of the state. State agencies make student loans, small business loans, and farm loans. State infrastructure banks explicitly leverage the credit of the state. Legally, state and local governments are extending their credit to private banks every time they deposit their revenues in those banks. When money is deposited, it becomes the property of the bank by law. The depositor becomes a creditor with an IOU or promise to be repaid. The state or local government has thus lent its money to the bank.

How can these blatant extensions of the state’s credit be reconciled with the constitutional prohibitions against the practice?

The state, any county or city may make internal improvements and may engage in any industry, enterprise or business, not prohibited by article XX of the constitution, but neither the state nor any political subdivision thereof shall otherwise loan or give its credit or make donations to or in aid of any individual, association or corporation except for reasonable support of the poor, nor subscribe to or become the owner of capital stock in any association or corporation.

Yet this prohibition has not prevented the state from establishing its own bank. Currently the nation’s only state-owned depository bank, the Bank of North Dakota has been a stellar success and has been going strong ever since 1919. In Green vs. Frazier, 253 U.S. 233 (1920), the US Supreme Court upheld the bank’s constitutionality against a Fourteenth Amendment challenge and deferred to the state court on the state constitutional issues, which had been decided in the state’s favor.

In the nineteenth century, Mississippi, Arkansas, Florida, Kentucky, and Indiana all had their own state-owned banks. Some were extremely successful (Indiana had a monopoly state-owned bank). These banks, too, withstood constitutional challenge at the US Supreme Court level.

Were the prohibitions against “lending the credit of the state” simply ignored in these cases? Or might that language have meant something else?

The Constitutional Ban in "Bills of Credit": Colonial Paper Money

Constitutional provisions against lending the state’s credit go back to the mid-nineteenth century. California’s is in its original constitution, dated 1849. There was then no national currency, and the National Bank Act had not yet been passed.

Several decades earlier, the states had been colonies that issued their own currencies in the form of paper scrip. Typically called “bills of credit”, these paper bills literally involved the extension of the colony’s credit. They were credit vouchers used by the colony to pay for goods and services, which were good in trade for an equivalent sum in goods or services in the marketplace.

Prior to the constitutional convention in the summer of 1787, the colonies exercised their own sovereign power over monetary matters, including issuing their own paper money. After the collapse of the Continental currency during the Revolutionary War, largely due to counterfeiting by the British, the framers were so afraid of paper money that they expressly took that power away from the colonies-turned-states, and they failed to expressly give it even to the federal government. Article I, Section 10, of the U.S. Constitution provides:

No State shall . . . coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; . . . .

Congress was given the power “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” But language authorizing Congress to “emit Bills of Credit” was struck out after much debate.

The Supreme Court ruled in the Legal Tender Cases after the Civil War that the power to coin money implied the power to print money under the Necessary and Proper Clause, legitimizing the Greenbacks issued by President Lincoln. But in 1850, no state government had the power to extend its own credit in the form of bills of credit or paper money, and whether the federal government had that power was a subject of debate.

However, the expanding economy needed a source of freely-expandable currency and credit, and when local governments could not provide it, private banks filled the void. They issued their own “bank notes” equal to many times their gold holdings, effectively running their own private printing presses.

Was that constitutional? No. The Constitution nowhere gives private banks the power to create the national money supply – and today, private banks are where virtually all of our circulating money supply comes from. Congress ostensibly delegated its authority to issue money to the Federal Reserve in 1913; but it did not delegate that authority to private banks, which have only recently admitted that they do not lend their depositors’ money but actually create new money on their books when they make loans. In the Bank of England’s latest Quarterly Bulletin, it states:

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

This broad exercise of the money power by private banks is nowhere to be found in our federal or state constitutions, but courts have managed to get around that wrinkle. In Constitutional Law in the United States, Emlin McClain summarizes the case law like this:

A state cannot, even for the purpose of borrowing money, exercise the sovereign power of emitting paper currency (Craig v. Missouri). But this prohibition does not interfere with the power of a state to authorize banks to issue bank notes in the form of due-bills or of similar character, intended to pass as currency on the faith and credit of the bank itself, and not of the state which authorizes their issuance.

The anomalous result is that state-chartered banks are able to issue credit that passes as currency, while state governments are not. But so the cases hold, and they apply to public banks as well as private banks.

Public Banks Held Constitutional

John Thom Holdsworth wrote in Money and Banking (1937) that in the mid-nineteenth century, “several of the states established banks owned entirely or in part by the state. There was some question as to the right of these state institutions to issue circulating notes, but the Supreme Court held that such notes were not ‘bills of credit’ within the meaning of the constitutional prohibition.”

The Court narrowly defined the sort of “bill of credit” prohibited by Article 1, Section 10, as a note issued by the state, on the faith of the state, designed to circulate as money. Since the notes in question were redeemable by the bank and not by the state itself, they were not “bills of credit” for constitutional purposes. The Court found that the notes were backed by the resources of the bank rather than the credit of the state. Moreover, the bank could sue and be sued separate from the state.

These cases are still good law. A state bank – or city bank or county bank – is not in violation of state constitutional prohibitions against lending the credit of the state.

For county-owned banks, the case is not as clear. In California, Government Code 23005 forbids counties from giving their “credit to or in aid of any person or corporation. An indebtedness or liability incurred contrary to this chapter is void.” But the US Supreme Court rulings validating state banks should be equally applicable to county banks; and in any case, enabling legislation can be crafted to allow public banks at any level of government.

There is another way to bypass this whole legal debate: by pursuing the initiative and referendum process pioneered in California. It allows state laws to be proposed directly by the public, and the state’s Constitution to be amended either by public petition (the “initiative”) or by the legislature with a proposed constitutional amendment to the electorate (the “referendum”). In California, the initiative is done by writing a proposed constitutional amendment or statute as a petition, which is submitted to the Attorney General along with a modest submission fee. The petition must be signed by registered voters amounting to 8% (for a constitutional amendment) or 5% (for a statute) of the number of people who voted in the most recent election for governor.

Before sufficient signatures could be collected, a widespread educational campaign would need to be mounted; but just informing the public on this little-understood subject could be worth the effort. Recall the words of Henry Ford:

It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

When enough people understand that private banks rather than governments create our money supply, imposing interest and fees that constitute an enormous unnecessary drain on the economy and the people, we might wake up to a new day in banking, finance, and the return of local economic sovereignty.

May 16, 2014

The plan to sequester funds urgently needed by Main Street to pay for Wall Street’s malfeasance is a bad one. Solution: a state-owned bank.

May 7, 2014 |

Governor Jerry Brown is aggressively pushing a California state constitutional amendment requiring budget surpluses to be used to pay down municipal debt and create an emergency “rainy day” fund, in anticipation of the next economic crisis.

On the face of it, it is a sensible idea. As long as Wall Street controls America’s finances and our economy, another catastrophic bust is a good bet.

But a rainy day fund takes money off the table, setting aside funds we need now to reverse the damage done by Wall Street’s last collapse. The brutal cuts of 2008 and 2009 shrank the middle class and gave California the highest poverty rate in the country.

The costs of Wall Street gambling are being thrust on its primary victims. We are given the choice of restoring much-needed services or maintaining austerity conditions in order to pay Wall Street the next time it brings down the economy.

There is another alternative – one that California got very close to implementing in 2011, before Jerry Brown vetoed the bill. AB750, a bill for a feasibility study for a state-owned bank, passed both houses of the state legislature but the governor refused to sign it. He said the study could be done by the Assembly and Senate Banking Committees in-house; but 2-1/2 years later, no further action has been taken on it.

Having a state-owned bank can substitute for a rainy day fund. Banks don’t need rainy day funds, because they have cheap credit lines with other banks. Today those credit lines are at the extremely low Fed funds rate of 0.25%. A state with its own bank can take advantage of this nearly-interest-free credit line not only for emergencies but to cut its long-term financing costs in half.

That is not just California dreaming. There is already a highly successful precedent for the approach. North Dakota is the only state with its own state-owned depository bank, and the only state to fully escape the credit crisis. It has boasted a budget surplus every year since 2008, and its 2.6% unemployment rate is the lowest in the country. Contrast that to California’s, one of the highest.

In a 2009 interview, Bank of North Dakota President Eric Hardmeyer stated that when the dot-com bust caused North Dakota to go over-budget in 2001-02, the bank did act as a rainy day fund for the state. To make up the budget shortfall, the bank declared an extra dividend for the state (its owner), and the next year the budget was back on track. No massive debt accumulation, no Wall Street bid-rigging, no fraudulent interest-rate swaps, no bond vigilantes, no capital appreciation bonds at 300% interest.

California already has a surfeit of surplus funds tucked around the state, which can be identified in state and local Comprehensive Annual Financial Reports (CAFRs). Clint Richardson, who has made an exhaustive study of California’s CAFR, writes that he has located nearly $600 billion in these funds. California’s surplus funds include those in a Pooled Money Investment Account managed by the state treasurer, which currently contains $54 billion earning a mere 0.24% interest – almost nothing.

The money in these surplus funds is earmarked for particular purposes, so it cannot be spent on the state budget. However, it can be invested. A small portion could be invested as capital in the state’s own bank, where it could earn a significantly better return than it is getting now. The Bank of North Dakota has had a return on equity ranging between 17% and 26% every year since 2008.

California has massive potential capital and deposit bases, which could be leveraged into credit, as all banks do. The Bank of England just formally admittedin its quarterly bulletin that banks don’t lend their deposits. They simply advance credit created on their books. The deposits remain in demand accounts, available as needed by the depositors (in this case the state).

The Wall Street megabanks in which California invests and deposits its money are not using this massive credit power to develop California’s economy. Rather, they are using it to reap short-term profits for their own accounts – much of it extremely short-term, “earned” by skimming profits through computerized high-frequency program trading. Meanwhile, Wall Street is sucking massive sums in interest, fees, and interest rate swap payments out of California and into offshore tax havens.

Rather than setting aside our hard-earned surplus to pay the piper on demand, we could be using it to create the credit necessary to establish our own economic independence. California is the ninth largest economy in the world, and the world looks to us for creative leadership.

“As goes California, so goes the nation.” We can lead the states down the path of debt peonage, or we can be a model for establishing state economic sovereignty.

Governor Jerry Brown is aggressively pushing a California state constitutional amendment requiring budget surpluses to be used to pay down municipal debt and create an emergency “rainy day” fund, in anticipation of the next economic crisis.

On the face of it, it is a sensible idea. As long as Wall Street controls America’s finances and our economy, another catastrophic bust is a good bet.

But a rainy day fund takes money off the table, setting aside funds we need now to reverse the damage done by Wall Street’s last collapse. The brutal cuts of 2008 and 2009 shrank the middle class and gave California the highest poverty rate in the country.

The costs of Wall Street gambling are being thrust on its primary victims. We are given the choice of restoring much-needed services or maintaining austerity conditions in order to pay Wall Street the next time it brings down the economy.

There is another alternative – one that California got very close to implementing in 2011, before Jerry Brown vetoed the bill. AB750, a bill for a feasibility study for a state-owned bank, passed both houses of the state legislature but the governor refused to sign it. He said the study could be done by the Assembly and Senate Banking Committees in-house; but 2-1/2 years later, no further action has been taken on it.

Having a state-owned bank can substitute for a rainy day fund. Banks don’t need rainy day funds, because they have cheap credit lines with other banks. Today those credit lines are at the extremely low Fed funds rate of 0.25%. A state with its own bank can take advantage of this nearly-interest-free credit line not only for emergencies but to cut its long-term financing costs in half.

That is not just California dreaming. There is already a highly successful precedent for the approach. North Dakota is the only state with its own state-owned depository bank, and the only state to fully escape the credit crisis. It has boasted a budget surplus every year since 2008, and its 2.6% unemployment rate is the lowest in the country. Contrast that to California’s, one of the highest.

In a 2009 interview, Bank of North Dakota President Eric Hardmeyer stated that when the dot-com bust caused North Dakota to go over-budget in 2001-02, the bank did act as a rainy day fund for the state. To make up the budget shortfall, the bank declared an extra dividend for the state (its owner), and the next year the budget was back on track. No massive debt accumulation, no Wall Street bid-rigging, no fraudulent interest-rate swaps, no bond vigilantes, no capital appreciation bonds at 300% interest.

California already has a surfeit of surplus funds tucked around the state, which can be identified in state and local Comprehensive Annual Financial Reports (CAFRs). Clint Richardson, who has made an exhaustive study of California’s CAFR, writes that he has located nearly $600 billion in these funds. California’s surplus funds include those in a Pooled Money Investment Account managed by the state treasurer, which currently contains $54 billion earning a mere 0.24% interest – almost nothing.

The money in these surplus funds is earmarked for particular purposes, so it cannot be spent on the state budget. However, it can be invested. A small portion could be invested as capital in the state’s own bank, where it could earn a significantly better return than it is getting now. The Bank of North Dakota has had a return on equity ranging between 17% and 26% every year since 2008.

California has massive potential capital and deposit bases, which could be leveraged into credit, as all banks do. The Bank of England just formally admittedin its quarterly bulletin that banks don’t lend their deposits. They simply advance credit created on their books. The deposits remain in demand accounts, available as needed by the depositors (in this case the state).

The Wall Street megabanks in which California invests and deposits its money are not using this massive credit power to develop California’s economy. Rather, they are using it to reap short-term profits for their own accounts – much of it extremely short-term, “earned” by skimming profits through computerized high-frequency program trading. Meanwhile, Wall Street is sucking massive sums in interest, fees, and interest rate swap payments out of California and into offshore tax havens.

Rather than setting aside our hard-earned surplus to pay the piper on demand, we could be using it to create the credit necessary to establish our own economic independence. California is the ninth largest economy in the world, and the world looks to us for creative leadership.

“As goes California, so goes the nation.” We can lead the states down the path of debt peonage, or we can be a model for establishing state economic sovereignty.

As the analysis shows, Los Angeles is nonetheless still being crushed by Wall Street—in this specific case, it is being forced to spend $300 million a year on financial fees.

When a city is forced to spend more on Wall Street fees than on basic public services, it is the sign of trouble. When that city is one of America's biggest population centers, it is the sign of a burgeoning crisis.

That's the key takeaway from a recent report looking at what has been happening in Los Angeles over the last few years. Published by the union-backed Fix LA Coalition, the report details how the city has slashed its spending in the wake of revenue losses from the Wall Street-engineered financial crisis. Yet, as the analysis shows, the city is nonetheless still being crushed by Wall Street — in this specific case, it is being forced to spend $300 million a year on financial fees. For some context, that's more than the city spends each year maintaining all of its roads.

So what specifically are these fees? According to the data, roughly $200 million worth of fees go to Wall Street money managers who oversee some of the city's pension investments. Yet, that's only a conservative estimate gleaned from analyzing documents that are publicly available. Because there's no one central accounting of the fees, and because other fees may be secret, the report notes that, just like in most locales, "neither the boards nor the investment staff employed by the boards know (exactly) how much they pay in total fees."

Moving forward, Los Angeles is now on the hook for $65.8 million worth of new fees in the next 14 years, thanks to a 2006 interest-rate swap deal.

"(Those) deals were sold on the assumption that they would save L.A. taxpayers money," notes the report. "But after the banks crashed the economy, the federal government drove down interest rates as part of the bank bailout, and now the banks are reaping a windfall at taxpayers' expense."

If this latter part of the story sounds familiar, that's because it is all too common.

Indeed, as my PandoDaily colleague Nathaniel Mott and I reported this week, this particular scheme has plagued cities across the country.

For instance, a recent study by former Goldman Sachs investment banker Wallace Turbeville documented how an interest-rate swap deal was a big driver of Detroit's fiscal crisis. In his report documenting Wall Street's demands for "upwards of $250-350 million in swap termination payments," Turbeville concluded that "a strong case can be made that the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals."

Likewise, Rolling Stone's Matt Taibbi documented how interest-rate swaps in connection with a water treatment plant were at the heart of Jefferson County, Alabama's infamous bankruptcy.

Meanwhile, a front-page New York Times story in 2010 showed how a swap deal in Denver orchestrated by then-superintendent Michael Bennet blew a hole in the city's school budget. In 2013, Bloomberg News reported that "Wall Street banks collected $215.6 million that Denver's public schools paid to unwind swaps and sell bonds" — a sum that "is about two-thirds of annual teaching expenses."

Recounting all of this is enough to depress anyone, but there is at least some sliver of good news. As of this week, Los Angeles city councilor Paul Koretz is proposing to exclude the banks at the center of the interest-rate scheme from any future business with the city unless those banks renegotiate the terms of their rapacious deal.

While this may not be a comprehensive solution, and while it may not work perfectly, it is a start. Indeed, the proposal shows that there are still ways for cities to start combating Wall Street's most destructive schemes. The fight is certainly long overdue, but better late than never.

posted May 16, 2011 from Yes! magazine

California is the eighth largest economy in the world, and it has a debt burden to match. The state has outstanding general obligation bonds and revenue bonds of $158 billion, largely incurred for building infrastructure. Over $7 billion of California’s annual budget goes to pay interest on the state’s debt.

As large as California’s liabilities are, they are exceeded by its assets, which are sufficient to capitalize a bank rivaling any in the world. That’s the idea behind Assembly Bill 750, introduced by Assemblyman Ben Hueso of San Diego, which would establish a blue ribbon task force to consider the viability of creating the California Investment Trust, a state-owned bank receiving deposits of state funds. Instead of relying on Wall Street banks for credit—or allowing a Wall Street bank to enjoy the benefits of lending its capital—California may decide to create its own, publicly owned bank.

What California can do with its own bank, other states can do as well, on a scale proportionate to their populations and economies.

On May 2, AB 750 moved out of the Banking and Finance Committee with only one nay vote, and is now on its way to the Appropriations Committee. Three unions—the California Nurses Association, the California Firefighters, and the California Labor Council—submitted their support for the bill. The state bank idea also got a nod from former Secretary of Labor Robert Reich in his speech at the California Democratic Convention in Sacramento the previous day.

Why a State Bank?

California joins eleven other states that have introduced bills to form state-owned banks or to study their feasibility. Eight of these bills were introduced just since January, including in Oregon, Washington State, Massachusetts, Arizona, Maryland, New Mexico, Maine and California. Illinois, Virginia, Hawaii and Louisiana introduced similar bills in 2010. [For more information about these proposals, see here.]

All of these bills were inspired by the Bank of North Dakota (BND), currently the nation’s only state-owned bank. While other states are teetering on the edge of bankruptcy, the state of North Dakota continues to report surpluses. On April 20, the BND reported profits for 2010 of $62 million, setting a record for the seventh straight year. The BND’s profits belong to the citizens and are produced without taxation.

The BND partners with local banks in providing much-needed credit for local businesses and homeowners. It also helps with state and local government funding. When North Dakota went over-budget a few years ago, according to the bank’s president Eric Hardmeyer, the BND acted as a rainy day fund for the state. And when a North Dakota town suffered a massive flood, the BND provided emergency credit lines to the city. Having a cheap and readily available credit line with the state’s own bank reduces the need for massive rainy-day funds (which are largely invested in out-of-state banks at very modest interest).

The Center for State Innovation, based in Madison, Wisconsin, was commissioned to do detailed analyses of the Washington and Oregon bills. Their conclusion was that a state-owned bank on the model of the Bank of North Dakota would have a substantial positive impact in those states, increasing employment, new lending, and government revenue.

What California Could Do with Its Own Bank

Banks create “bank credit” from capital and deposits, as explained here. Under existing regulations, $8 in capital reserves can be leveraged into $100 in loans, drawing on the liquidity provided by the deposits to clear the outgoing checks. Assuming a 10 percent reserve requirement (the amount in deposits normally held in reserve), $8 in capital and $100 in deposits are sufficient to create $90 in loans ($100 less $10 held back for reserves).

In North Dakota (population 647,000), the Bank of North Dakota has $2.7 billion in deposits, or about $4,000 per capita. The majority of these deposits are drawn from the state’s own revenues. The bank has nearly the same sum ($2.6 billion) in outstanding loans.

California has 37 million people. If the California Investment Trust (CIT) performed like the BND, it might amass $148 billion in deposits. With $12 billion in capital, this $148 billion could generate $133 billion in credit for the state (subtracting 10%, or 14.8 billion, to satisfy reserve requirements).

There are various ways the state could come up with the capital, but one possibility that would not require new taxes or debt would be to simply draw on the treasurer’s existing pooled money investment account, which currently contains $65 billion in accumulated revenues dispersed to a variety of funds. This money is already invested; a portion could be shifted to the CIT. Since it would be an investment in equity rather than an expenditure, it would not cost the state money. Rather, it would make money for the state. In recent years, the Bank of North Dakota has had a return on equity of 25-26 percent. Compare the 25-30 percent lost in the two years following the 2008 banking crisis by CalPERS, the California Public Employees’ Retirement System, which invested its money on Wall Street.

There are many inviting possibilities for applying the CIT’s $133 billion in credit power, but here is one easy alternative that illustrates the cost-effectiveness of the approach. Assume the bank invested $133 billion in municipal bonds at 5 percent interest. This would give the state close to $7 billion annually in interest income—nearly enough to pay the interest tab on the state’s debt.

Choosing Prosperity

What California can do with its own bank, other states can do as well, on a scale proportionate to their populations and economies. North Dakota has a population that is less than 1/10th the size of Los Angeles; last year, the BND produced $62 million in revenue and $2.2 billion in loans. Larger states could generate much more.

We have been trapped in an austere neo-liberal economic model in which the only alternatives are to slash services, raise taxes, and sell off public assets, all in a futile attempt to “balance the budget” in a shrinking economy. We need to start thinking outside the box. We can choose prosperity, and public banks are a key tool for achieving that end.

In the 2012 edition of Occupy Money released last week, Professor Margrit Kennedy writes that a stunning 35% to 40% of everything we buy goes to interest. This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP. That helps explain how wealth is systematically transferred from Main Street to Wall Street. The rich get progressively richer at the expense of the poor, not just because of “Wall Street greed” but because of the inexorable mathematics of our private banking system.

This hidden tribute to the banks will come as a surprise to most people, who think that if they pay their credit card bills on time and don’t take out loans, they aren’t paying interest. This, says Dr. Kennedy, is not true. Tradesmen, suppliers, wholesalers and retailers all along the chain of production rely on credit to pay their bills. They must pay for labor and materials before they have a product to sell and before the end buyer pays for the product 90 days later. Each supplier in the chain adds interest to its production costs, which are passed on to the ultimate consumer. Dr. Kennedy cites interest charges ranging from 12% for garbage collection, to 38% for drinking water to, 77% for rent in public housing in her native Germany.

Her figures are drawn from the research of economist Helmut Creutz, writing in German and interpreting Bundesbank publications. They apply to the expenditures of German households for everyday goods and services in 2006; but similar figures are seen in financial sector profits in the United States, where they composed a whopping 40% of U.S. business profits in 2006. That was five times the 7% made by the banking sector in 1980. Bank assets, financial profits, interest, and debt have all been growing exponentially.

By 2010, 1% of the population owned 42% of financial wealth, while 80% of the population owned only 5% percent of financial wealth. Dr. Kennedy observes that the bottom 80% pay the hidden interest charges that the top 10% collect, making interest a strongly regressive tax that the poor pay to the rich.

Exponential growth is unsustainable. In nature, sustainable growth progresses in a logarithmic curve that grows increasingly more slowly until it levels off (the red line in the first chart above). Exponential growth does the reverse: it begins slowly and increases over time, until the curve shoots up vertically (the chart below). Exponential growth is seen in parasites, cancers . . . and compound interest. When the parasite runs out of its food source, the growth curve suddenly collapses.

People generally assume that if they pay their bills on time, they aren’t paying compound interest; but again, this isn’t true. Compound interest is baked into the formula for most mortgages, which compose 80% of U.S. loans. And if credit cards aren’t paid within the one-month grace period, interest charges are compounded daily.

Even if you pay within the grace period, you are paying 2% to 3% for the use of the card, since merchants pass their merchant fees on to the consumer. Debit cards, which are the equivalent of writing checks, also involve fees. Visa-MasterCard and the banks at both ends of these interchange transactions charge an average fee of 44 cents per transaction—though the cost to them is about four cents.

How to Recapture the Interest: Own the Bank

The implications of all this are stunning. If we had a financial system that returned the interest collected from the public directly to the public, 35% could be lopped off the price of everything we buy. That means we could buy three items for the current price of two, and that our paychecks could go 50% farther than they go today.

Direct reimbursement to the people is a hard system to work out, but there is a way we could collectively recover the interest paid to banks. We could do it by turning the banks into public utilities and their profits into public assets. Profits would return to the public, either reducing taxes or increasing the availability of public services and infrastructure.

By borrowing from their own publicly-owned banks, governments could eliminate their interest burden altogether. This has been demonstrated elsewhere with stellar results, including in Canada, Australia, and Argentina among other countries.

In 2011, the U.S. federal government paid $454 billion in interest on the federal debt—nearly one-third the total $1,100 billion paid in personal income taxes that year. If the government had been borrowing directly from the Federal Reserve—which has the power to create credit on its books and now rebates its profits directly to the government—personal income taxes could have been cut by a third.

Borrowing from its own central bank interest-free might even allow a government to eliminate its national debt altogether. In Money and Sustainability: The Missing Link(at page 126), Bernard Lietaer and Christian Asperger, et al., cite the example of France. The Treasury borrowed interest-free from the nationalized Banque de France from 1946 to 1973. The law then changed to forbid this practice, requiring the Treasury to borrow instead from the private sector. The authors include a chart showing what would have happened if the French government had continued to borrow interest-free versus what did happen. Rather than dropping from 21% to 8.6% of GDP, the debt shot up from 21% to 78% of GDP.

“No ‘spendthrift government’ can be blamed in this case,” write the authors. “Compound interest explains it all!”

More than Just a Federal Solution

It is not just federal governments that could eliminate their interest charges in this way. State and local governments could do it too.

Consider California. At the end of 2010, it had general obligation and revenue bond debt of $158 billion. Of this, $70 billion, or 44%, was owed for interest. If the state had incurred that debt to its own bank—which then returned the profits to the state—California could be $70 billion richer today. Instead of slashing services, selling off public assets, and laying off employees, it could be adding services and repairing its decaying infrastructure.

The only U.S. state to own its own depository bank today is North Dakota. North Dakota is also the only state to have escaped the 2008 banking crisis, sporting a sizable budget surplus every year since then. It has the lowest unemployment rate in the country, the lowest foreclosure rate, and the lowest default rate on credit card debt.

Globally, 40% of banks are publicly owned, and they are concentrated in countries that also escaped the 2008 banking crisis. These are the BRIC countries—Brazil, Russia, India, and China—which are home to 40% of the global population. The BRICs grew economically by 92% in the last decade, while Western economies were floundering.

Cities and counties could also set up their own banks; but in the U.S., this model has yet to be developed. In North Dakota, meanwhile, the Bank of North Dakota underwrites the bond issues of municipal governments, saving them from the vagaries of the “bond vigilantes” and speculators, as well as from the high fees of Wall Street underwriters and the risk of coming out on the wrong side of interest rate swaps required by the underwriters as “insurance.”

One of many cities crushed by this Wall Street “insurance” scheme is Philadelphia, which has lost $500 million on interest swaps alone. (How the swaps work and their link to the LIBOR scandal was explained in an earlier article here.) Last week, the Philadelphia City Council held hearings on what to do about these lost revenues. In an October 30th article titled “Can Public Banks End Wall Street Hegemony?”, Willie Osterweil discussed a solution presented at the hearings in a fiery speech by Mike Krauss, a director of the Public Banking Institute.

Krauss’ solution was to do as Iceland did: just walk away. He proposed “a strategic default until the bank negotiates at better terms.” Osterweil called it “radical,” since the city would lose it favorable credit rating and might have trouble borrowing. But Krauss had a solution to that problem: the city could form its own bank and use it to generate credit for the city from public revenues, just as Wall Street banks generate credit from those revenues now.

A Radical Solution Whose Time Has Come

Public banking may be a radical solution, but it is also an obvious one. This is not rocket science. By developing a public banking system, governments can keep the interest and reinvest it locally. According to Kennedy and Creutz, that means public savings of 35% to 40%. Costs can be reduced across the board; taxes can be cut or services can be increased; and market stability can be created for governments, borrowers and consumers. Banking and credit can become public utilities, feeding the economy rather than feeding off it.

When someone says "loans create deposits," usually that means at least that the marginal impact of new lending will be to create a new asset and a new liability for the banking system. But in our system it's actually a bit more complicated than that.

A bank makes a loan to a borrowing customer. This simultaneously, creates a credit and a liability for both the bank and the borrower. The borrower is credited with a deposit in his account and incurs a liability for the amount of the loan. The bank now has an asset equal to the amount of the loan and a liability equal to the deposit. All four of these accounting entries represent an increase in their respective categories: the bank's assets and liabilities have grown, and so has the borrower's.

It's worth noting that at least two more types of liabilities are also created at this moment: a reserve requirement is created and a capital requirement is created. These aren't standard financial liabilities. They are regulatory liabilities.

The reserve requirement arises with the creation of the deposit (the bank's liability), while the capital requirement arises with the creation of the loan (the bank's asset). So loans create capital requirements, deposits create reserve requirements.

Banks are required to have a 10 percent reserve for deposits. (For simplicity's sake we're going to ignore some technical aspects of reserve requirements that actually make this number smaller than 10 percent.) Which means that a bank incurs a reserve requirement of $10 for every $100 deposit it takes on. Since loans create deposits, a $100 loan gives rise to a $10 required reserve liability.

To be considered well-capitalized, a bank in the U.S. must currently have a 10 percent combined Tier One and Tier Two Capital ratio (we'll ignore the more complicated angles for capital requirements also). What this means is that the $100 bank loan gives rise to a regulatory capital liability of $10 of Tier One/Two Capital.

What this means is that the $100 loan that created a $100 deposit, actually created a $100 asset for the bank (the loan) and $120 of liabilities (the deposit plus the required reserves and capital). That might sound like a pretty bad deal for a bank. But it's not quite as bad as you might think.

Let's imagine a bank that is starting off from scratch. Scratch Bank lends $100 to Mr. Parker. It does this by crediting Mr. Parker's deposit account at Scratch Bank with $100. The bank must now immediately figure out how to meet its two new liabilities: its reserve requirement and its capital requirement.

To raise the $10 of required capital, Scratch Bank will have to sell shares, raise equity-like debt or retain earnings. Since Scratch Bank just got started, the only way to create immediate earnings would be to charge a ten percent origination fee to Mr. Parker. The last option isn't really as outlandish as it sounds (although 10 percent is way too high). Lots of loans come with versions of origination fees that can go to help banks settle their capital requirements. A $10 fee that is kept as retained earnings would completely satisfy the capital requirement.

This is actually quite extraordinary. The bank is meeting its capital requirement by discounting a deposit that it created out of its own loan. Which is to say, it is meeting the capital requirement with nothing other than its own money creation power. This makes sense because, as we will see in a moment, the effect of it is to reduce the liability of the bank without reducing its asset. What it really does is allow the bank to have an asset that is greater than the deposit liability it created.

Note that the way this would be done, in most circumstances, would be to net the $10 fee directly out of the $100. So the actual deposit would be just $90 dollars. The bank's reserve requirement would decrease by $1 dollar because of this accounting. Which means that the $100 loan really creates $119 of liabilities for the bank: a $9 reserve requirement plus a $10 capital requirement.

How can the bank meet the requirement for $9 of reserves? It could try to attract a new customer, let's call him Mr. Christie, who would deposit at least $10 dollars. This would create a liability for the bank of $10 as well as a cash balance (an asset) of $10. The bank would need to use $1 dollar of this as a reserve for Mr. Christie's account and could use the rest as the reserve for Mr. Parker's account. (There's no capital requirement for a cash asset, so the reserve requirement is the only one that applies.)

The bank could also borrow the reserves from another bank in what's known as Fed Funds market. This is the unsecured overnight lending market in which banks with excess reserves lend to banks with deficient reserves. Basically, instead of getting Mr. Christie to deposit $10 in Scratch Bank, Scratch Bank would borrow that deposit from Establishment Savings Bank instead. Right now the Federal Reserve targets the interest rate in this market as between 0 and 0.25 percent. In other words, acquiring the $9 of reserves is easy as pie.

Now here's what happens when Mr. Parker writes a check on his account to pay for a new window for his shop (it was broken by someone who wanted to stimulate the local economy, of course.) Scratch Bank will need to transfer $90 dollars to the window maker's bank through the payment system of the Federal Reserve. Scratch Bank, however, doesn't have anything like $90. All it has is $9 dollars in borrowed reserves plus $10 in retained earnings.

The bank can't use those $10 in retained earnings, however, because it needs them to meet its capital requirement. Even though the withdrawal of the $90 from the bank account extinguishes the need for a reserve requirement against the deposit, the loan still remains outstanding. Which, in turn, means the capital requirement remains in place.

So it needs to raise $81 from someone — more depositors, the interbank market, or perhaps money market funds willing to lend against some collateral. The only collateral it has is the loan to Parker, which is worth $100. After a haircut of a couple of points, however, raising $81 shouldn't be too much of a problem.

Note that the capital requirement has done its job, even though it was funded with bank created money. Because the bank effectively lent out only $90 dollars while creating a $100 loan, it is able to borrow on the collateralized market to fund its liability when the deposit created by the loan is drawn. It can borrow the $90 it needs to satisfy its reserve and withdrawal liability, take a pretty steep discount and still make a profit on the spread.

In other words, the effect of the origination fee is the same as if it actually raised outside capital. If instead of funding the loan with a fee, the bank met the capital requirement by sell $10 worth of equity, it would have had a $100 liability, a $100 asset, a $10 reserve requirement and a $10 capital requirement. When the money was withdrawn, it would owe $100 to the receiving bank. This could be paid with the $10 raised in equity, and $90 in borrowed funds. It doesn't really matter whether the capital requirement is met through outside capital, fee income or a combination of both (which is how it is done in real life).

Of course, for this to work, the market has to believe that the value of the loan to Mr. Parker is actually worth more than the $90. If counter-parties believe there is a significant chance that Mr. Parker will default on his loan, it could be worth less than $90. In that case, Scratch Bank would be forced to find other sources of funding — new investors, a government bailout—or default on its obligations to the window maker's bank.

But let's say it does work. What we have here is a functioning bank, a demonstration of how the basic infrastructure of banking is not built on a foundation of a bunch of cash that is then lent out. It's built on the loans themselves, with capital and reserves raised to meet regulatory requirements.